11

High-powered money is another term for the monetary base or MB. MB represents all money created by the government. However, that is not all the only source of money. Banks are allowed to create money too. Which is why higher aggregates like M2 and M3 are greater than MB. Because bank money is greater than government money, it (and not MB) is more of a ...


10

"Foreign Direct Investment" is to be understood as bringing in an economy productive capital, and not just purchasing power. When an economy is seriously below full employment (of capital and labor), then a case can be made that "printing money" (i.e. creating purchasing power out of thin air) may not result in just inflation, but it may ...


9

For Quantitative Easing to happen, a central bank needs to expand its balance sheet by, more or less, "printing money" from scratch. Quantitative Easing is a difficult policy in that you want to encourage inflation to force investment, but at the same time you need to control that inflation. For this reason QE should be used only when central banks believe ...


6

What is QE: QE is simply an asset purchase by central bank. As explained by Fed St. Louis QE is defined as: large-scale asset purchases—in the hundreds of billions of dollars range—of, for example, mortgage-backed securities and Treasury securities. Furthermore, under QE this is done with newly created reserves. Generally these assets are actually not ...


5

The unwind depends upon what the central bank did. If the central bank did a repurchase agreement (“repo”) or lent against assets for a fixed time, the agreement automatically unwinds at the term of the deal (which is short). They would need to enter into new deals to keep their balance sheet size unchanged. If they bought the asset outright, it will either ...


4

The ECB faces a unique challenge in that the Eurozone is a monetary union without a fiscal union. Because each country has autonomy over their own fiscal policy and there is no separate Eurobond, it is unclear which countries' bonds the ECB would buy to perform Quantitative Easing. In the US this is easy because of the presence of US Treasury Bonds that the ...


4

This is a partial answer, in the sense that it addresses the case for state-sponsored house building, rather than the question of how that should be financed. In general, any means by which the state might finance spending is likely to introduce some kind of distortion into the economy. The question then faced is whether that spending generates benefits ...


4

Quantitative easing (QE) is an historically unusual monetary policy tool that involves the purchase of financial assets by the central bank. Unlike similar assete purchases used for moving exchange rates, these assets are typically local currency denominated and not sterilized. Although central bank purchase of government debt occurs in both QE and ...


4

You should be confused by Japan's version of QE. No one knows the long term implications, it has never been done before. I don't know that much about Japan's QE other than the monthly totals, but the concept behind QE is simple. Normally, when a central bank wants to stimulate economic activity, they will do so by reducing the returns on saving and ...


4

There's a pretty simple answer to that. The money injected into the banking system does not acquire any velocity- it just gets redeposited at the Fed. If they had spent the same amount of money into the general economy in the form of goods and services, then you would have seen higher inflation.


4

The exchange rate can be expressed in a simple classroom monetary model as: $$S = \tilde{m} - \psi \tilde {y} + \lambda (\tilde i)$$ Where $S$ is the exchange rate $m$ is log of money supply, $y$ log of real output $i$, interest rate, $\tilde{}$ denotes differences between variable at home and abroad (i.e. $\tilde{x} = x_{home}-x_{foreign}$), and $\psi$ &...


4

It is correct that quantitative easing (QE) is not exactly the same as just printing money. However, I would hesitate to say equating it to printing money is complete misnomer (although its not accurate analogy either) and I also dont think that your description of QE is completely accurate. QE actually begins with creation of new money. As explained by Fed ...


4

Will this policy advantage the financial sector over other parts of the economy? I do not see how this would a priori advantage the financial sector over other parts of the economy. This policy is done to stimulate economic activity by putting pressure on lowering the long-term interest rates and to push pressure on inflation and lower exchange rate. Such ...


3

First of all, I'm not sure you are reading that article correctly, as I cannot find any mention of the claim you make. In any case, you can find here a superb comparative analysis of QE for the Fed, the Bank of Japan, the ECB and the Bank of England. Regarding money creation, the key difference between conventional monetary policy and QE is the type of ...


3

No, the deficit is not getting larger due to QE. Certainly not directly, because that's impossible, and also not indirectly, either. Quantitative easing is a policy of purchasing government bonds with the intent of decreasing yields while injecting cash into the economy. It affects only the demand for government bonds, not the supply of bonds created by ...


3

The easiest way to estimate the total amount of quantitative easing is to look at the change in the balance-sheet of the Federal Reserve because every bit of money put in through quantitative easing involved the purchase of assets which grew the central bank's balance sheet. You can see in the graph above that the total growth is about \$3.6T. There are ...


3

Money doesn't build houses: people do. Building houses requires real resources. Money is not a real resource, it is just a means of exchanging resources. So, as a first approximation, printing money just leads to inflation.1 There is an additional problem to consider. People who spend their time building houses cannot use that time for producing other goods,...


3

Yes they are "gift" (or rather a stimulus), but not exclusively to the 0.1%. There's basically "trickle down" by inflating the M2 money supply, i.e. bank loans, which hopefully include loans to companies where the "average guys" work. So in theory, banks have more funds to lend, at a low rate of interest, encouraging households ...


3

I actually found a model that proposes an estimator of CPI increase from a QE "unit" (relative to GDP), but this is based on ECB's intervention (which came pretty late compared to others). This is a New Keynesian DGSE with QE as an estimated AR(2) process. The "initial shock" is a 1% increase in ECB's bond-long term bond holdings, relative to quarterly GDP. ...


3

This is veering into the direction of an opinion-based answer, but I would argue that there is no particular evidence that the Fed “needs” to reduce the size of its balance sheet. If the Fed wanted to revert to its pre-2008 mode of operations - where interest is not paid on reserves - it would be required to reduce its balance sheet so that there are no ...


3

During QE what prevents the banks from selling government debt to invest in the stock market instead of lending out the money? Nothing. Depending on which country we are talking about there might be a regulation preventing/limiting some banks investing in a stock market, in order to make banking sector less prone to collapse. For example, Basel rules ...


2

I'll answer the first question. How is this fair for every other constituent in the economy who has earned money the hard way, by working and not by generating it so freely like interest returns on this free money do for commercial banks? Remember that commercial banks don't create money from nothing at all. When they create a loan, they also create a ...


2

1) In principle, there is nothing material to stop the central banks. Apparently, during the great recession in the 1930's in the US, the fed bought even stranger stuff. They could go domestic bonds, equities, houses, etc, and then they could go to foreign assets. 2) No, they cannot literally go bankrupt because they can always print money. Some banks have ...


2

Addressing your question directly, yes, the rate will necessarily decrease. The Fed's purchases of MBS were entirely MBS that were securitized by the government-sponsored enterprises (GSEs). GSE MBS are not subject to credit risk, as the credit risk is guaranteed by the GSEs. Further, banks underwriting mortgages that are securitized through this channel ...


2

Bank of England decided to lower reserve interest rates to 0.25%. This means the central bank wants to reduce the interest paid on reserved stash, discourage bankers parking too much money in central bank. With smaller return from central bank interest rate, this is just a policies that central bank hope the bank will use the money to invest or buy bonds....


2

It’s an editorial opinion, and it’s hard to give it a technical meaning. The distinction being made in the text is between growth in the “real economy” - which would be measured by GDP and/or consumer price inflation - and growth in asset values. For example, there could be no direct job creation because of QE, just equity prices going up. However, this ...


2

For considering a question like this, because the Federal Reserve remits seigniorage to the Treasury, it can be helpful to integrate the balance sheet of the central bank and the treasury and consider them as a single entity. Since QE involves the purchase of higher interest rate long dated debt and financing that purchase with lower interest rate central ...


2

This is a transaction where productive assets change hands, it is not a transaction that reflects production. Moreover assume that the company oparates exactly as before, producing the same output in quantity and quality and with the same prices and with the same costs. Then nothing has changed in the economy as regards production (and so income). The ...


2

As I noted in a comment, the description in this question of real world central banks is overly simplistic. Central banks do not make proportional changes to the monetary base to set the price level. However, I will ignore those problems, and just address the core of the question: 1) Will it make sense to change account balances on a pro rata basis to keep ...


2

The question as it stands now contains points that are debatable. So I will just attempt to answer a similar question; the question could be revised in response. There are a number of other questions on QE that offer some background. Difference between QE and regular monetary operations Limits to QE My revised version of the question is: “In quantitative ...


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