The Quantitative Easing Policies (QE) During Recessions and The Monetary Policy Issues Especially Still the Relevance of The Money Supply

Abstract

Thomas Muthucattu Paul* and Jiji T Mathew

This short article discusses the economic background under which the Quantitative Easing (QE) policies have been initiated by the major central banks of the advance countries in the world. The QE was initiated by the major central banks because the conventional ‘inflation targeting policy through short term interest rates policies were found to be ineffective in fighting the recession of the years 2008-2009, as the short term interest rates had already reached a floor and the central banks could not reduce the rates further down. This might have been due to the ‘Keynesian Liquidity trap’. Then the central banks resorted to buying the long-term assets such as the bonds, the mortgage securities and selling or pumping the money to the public, financial institutions and the households. We have discussed the operation and working of these QE policies in the USA, the U.K, Europe, and Japan. We have also evaluated the effectiveness of the QE policies in those major countries and economies. Our assessment has been by and large very positive about the QE policies; however, there have been some distributional effects, which have reduced the intended effectiveness of the QE policies in those countries. Further, the conventional money supply, either the narrow money, M1, or the broad money supply, M3, are found to be empirically very important to judge the effectiveness of the monetary policy especially during the recessions of 2008-2009.

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