Quantitative Easin1.docx - Quantitative Easing Abstract The...

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Quantitative Easing Abstract The policies applied by the Central Bank, as well as their limiting features in as far as the regulation of the economy is concerned have been on the forefront in the debate conducted over the variations in the money supply, as well as demand levels. The effectiveness of one policy in one area cannot offer a guarantee of the success of the same in another jurisdiction. It is in this regard that this paper sets out to study the desirable features of Quantitative Easing, which ensured the success of the policy in ensuring that the economy was restored to a desirable level. Introduction Since the time when the Euro Zone was created in 1999, the debate on the various monetary policy tools, as well as their effects on various countries has been ongoing, and has been so heated because each one of the participants’ arguments are backed up with facts (Kimura & Small, 2006). The recent economic crisis over the region intensified the debate, and has even led to the questioning of the extent of truth of the assertion that the Euro Zone is a favorable region for the study. Whereas the other monetary policy techniques are vital in the analysis of the factors responsible for the current situation in the Euro Zone, it is by focusing on others that are deemed more important as the Quantitative Easing technique that the recent situation in the region can be understood well (Williamson, 2014). Background information Quantitative Easing is a monetary policy tool, which is often used by various countries’ central banks for economic stimulation whenever standard tools of monetary policy employment
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have ceased to be effective. The means of application of Quantitative Easing is by way of purchase of specific financial assets from commercial banks, with the intention of increasing their prices. By extension, such actions often lead to a lowered yield to the specific assets, while at the same time raising the monetary base of the country. The difference, which exists between these types of arrangements from the other policies, which entail the purchasing of government bonds, with relatively shorter periods of maturity is the time taken to realize returns intended (Kawai, 2009). Regulatory policies Expansionary policies are such that they are intended to raise the amount of money within the economy, and usually entail the purchase by the central bank of government-issued bonds. Such actions result in lowered market interest rate levels in the short-term period. On the contrary, whenever short-term levels of interests approach zero, the extent of application of this criteria becomes lower, until a point in which it becomes ineffective (Hudson, 2009). In the wake of such situations, the use of quantitative easing becomes necessary to ensure that further simulation of the economy is made possible by way of asset purchasing (Heslop, 2011). The assets to be purchased are those whose period of maturity is relatively high, as this serves to
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