Qe2 - Was It Necessary to Stimulate Economic Growth

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ABSTRACT “QE 2” – Was it necessary to stimulate economic growth or is it sowing the seeds for undesirable levels of inflation in the years ahead? How would your view impact your investment strategy? | Kunal MishraRutgers Business School |

Introduction to Quantitative Easing (QE):
Quantitative easing (QE) is an unconventional monetary policy tool used by some central banks to stimulate the national economy when conventional monetary policy has become ineffective. In the late 2008 Federal Reserve pursued this unconventional policy of purchasing large quantities of long-term securities, including Treasuries, Agency bonds, and Agency Mortgage Backed Securities. The stated objective of quantitative easing is to reduce long-term interest rates in order to spur economic activity. A central bank implements quantitative easing by purchasing financial assets from banks and other private sector businesses with new money that is created electronically. This action increases the excess reserves of the banks, and also raises the prices of the financial assets bought, which further lowers their yield. The recent quantitative easing policy targeted at credit easing in the business and household sector, so that the increase in reserves is a by-product rather than an objective of monetary policy.
As a part of its expansionary monetary policy the Fed has maintained a lower short-term market interest rate through the buying of short-term government bonds, using a combination of lending facilities and open market operations. However, with the housing bubble reaching the sky, consumer spending and consumer confidence has been quite low and also with short-term interest rates at, or close to zero, normal monetary policy has lost its ability to impact the market demand that could alter the longer term interest rates.
Quantitative easing was therefore used by Ben Bernanke and…...

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