Critically examine the use of the quantitative easing as a policy Essay

Critically examine the use of the quantitative easing as a policy option to help to solve the uk's current economic problems - Essay Example Following the 2008, financial crisis qualitative easing became an element of recovery to the central banks that their interest rates were close to zero lower bound or at zero (Benford, Berry, Nikolov, & Young, 2009). With the intensification of the crisis, most international central banks took possible measures in supporting demand and loosening monetary policies. The bank of England through its monetary policy committee (MPC) dealt with it by cutting interest rates by up to three percentage points in bank rate. In early 2009, the bank further reduced it by one and half percent. MPC in their analysis explained that the cut could not meet the consumer price index of two percent hence need to purchase private and public assets using the central bank money. This led to the introduction of qualitative easing in the United Kingdom economy. The idea behind this was to inject liquid money back into the economy to help boost nominal spending and achieve the two percent inflation target. Disc ussion To avert the financial crisis, the bank of England purchased a large amount of United Kingdom governments bonds (gilts). By January 2010, the bank had purchased medium and long-dated gilts worth 200 billion of assets, and this represented fourteen percent of annual GDP and 30 percent of private sector outstanding gilts. In so doing, and by a combination of support measures the bank balance sheet increased in relation to the GDP threefold before the crisis. To implement this technique further, the government gave authority to the bank to purchase corporate bonds and high quality paper. The government did so in order to improve market functioning by acting as a backstop buyer and seller (Hamilton, 2010). The asset purchasing is one of the unconventional policy measures applied in the bank to loosen the monetary policy. The bank aim of assets purchasing was to cut the bank rates and hence stimulating nominal spending with the aim of meeting the two percent inflation target. This initiative also alleviated inflation that had been domestically generated. Assets purchases affected inflation and spending through different potential channels. First, it increased money holdings and pushed up the assets prices while stimulating the expenditure by increasing wealth and lowering borrowing costs. It also stimulated impact by broadening expectations and its influence on bank lending rates. Effects of assets purchasing The purchasing of assets led to Policy signaling effects, which included the expectations by market participants of policy rates to remain low for longer. At the time of expectations, policy makers were dealing with the issue of falling inflation below the expected medium target. The falling of inflation could have led to push up on real interest rates while reducing spending and keeping of nominal rates at low levels (Hancock, & Passmore, 2011). The assets purchase assisted in keeping inflation expectations on target through supporting of spending. The signaling effect anchored inflation expectations on track hence the hiding the real state of the economy to the agents on their views. The other effect of assets purchasing in stabilizing the economy was through portfolio balance effects, which entailed pushing up prices of other assets and the bought assets. This happened in the sense that after the bank buying assets, there is an increase in money