Quantitative Easing - Managerial Economics - Lecture Slides, Slides of Managerial Economics

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QE Policy, Fiscal Cliff, Euro

Zone Crisis, Abenomics

What is QE?

 Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy.  A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money in order to inject a pre-determined quantity of money into the economy.

Problem faced by Conventional Monetary Policy

 When short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates.

QE as an alternative way

 Quantitative easing is used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short- term government bonds, and thereby lowering longer-term interest rates  These financial assets include US treasury securities, mortgage-backed securities, and federal agency securities.

Impacts of QE Policy on USA

 Raises Monetary Base  Lower Interest Rate  Increase inflation rate  Beneficial to housing market and stock market  Increases the capital outflow  US dollar depreciates

What is Fiscal Cliff?

 The fiscal cliff is a term referring to the effect of a number of laws which (if unchanged) could result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013.  The budget deficit is expected to be reduced by roughly half in 2013. That sharp reduction is the cliff. It will reduce federal spending by $103 billion and increase tax revenues by $399 billion.

Extended Acts of Bush Tax Cut

 Dec. 2010: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act. The Act extended the Bush tax cuts for additional two years. (e.g. patch the exemption to Alternative Minimum Tax; reduce the social security payroll tax by 2%)  Beginning of 2012: Middle Class Tax Relief, and Job Creation Act. The Act extended the Bush tax cuts for an additional year.

Content of Budget Control Act

 The Budget Control Act included an immediate increase in the debt ceiling. It also provided for automatic spending cuts to begin on January 2, 2013 if the government fails to decrease the deficit by $1. trillion over ten years.  The US government appears on the path to hit the $16.394 trillion federal borrowing limit sometime in January 2013.

Impacts of Fiscal Cliff on USA

 The Congressional Budget Office (CBO) estimates the sudden reduction will probably lead to a recession (-0.5% GDP growth rate) in early 2013 with the pace of economic activity picking up after

What is European Sovereign Debt Crisis?

 Euro Zone Crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties.

PIGS

 P ortugal  I taly (Ireland)  G reece  S pain

Examples

 Ireland's banks lent the money to property developers, generating a massive property bubble. When the bubble burst, Ireland's government and taxpayers assumed private debts.  Iceland's banking system grew enormously, creating debts to global investors.  In Greece, the government increased its commitments to public workers in the form of extremely generous wage and pension benefits, with the former doubling in real terms over 10 years

Debt Ratio

Bond Interest Rate