Quantitative Easing Monetary Policy:Theoretical Basis, Practical Effect And Economic Impact

In1936, John Maynard Keynes published his famous book The General Theory of Employment, Interest and Money, creating the important branch of economics:macroeconomics. In this book, Keynes used the macro-analysis method to research total economy and mutual relation among income, consumption, investment and currency, making the economic study switched from micro-analysis to macro-analysis. Keynes witnessed many shortcomings of the free-market economy under the circumstance of the Great Depression in the1930s. He believed that there was non-market clearing and non-full employment in the free market economy, lacking of the effective demand was the normal state of the economy, he advocated using the proactive fiscal policy and expansionary monetary policy to stimulate consumption and investment, increasing the total social demand. Keynesian theory provided the economic basis for government intervention, since then Keynesian theory became the mainstream of economics in the next more than half century. Although Keynesian theory was challenged and questioned by the stagnant of western-countries in the1970s, the free market economy was favored by economic profession again. However, financial crisis, economic recession and deflation became the chronic problem of the troubled economy of the world in the next30years, Keynesian theory gradually restored the past eye-catching light, and became the "silver bullets" of the governments and central banks.In1985, Japan sighed the Plaza Accord, the yen was forced to appreciate significantly, the Bank of Japan implemented extremely loose monetary policy in order to weak the impact of the yen’s appreciation on exports, which planted a hidden danger for Japanese bubble economy, and then Japanese economy experienced a painful "lost decade". When the Japanese economy started to restore gradually, the Asian Financial Crisis broke out, which made the Japanese economy even worse. In desperation, the Bank of Japan implemented quantitative easing monetary policy(QEMP) from March2001, unveiling the prelude to the study of the QEMP. Facing the most serious financial crisis since the Great Depression, the Fed has to use QEMP twice successively, raising a great concern in economists. Economic growth stagnation, deflation and high unemployment make the Fed and other developed countries’central bank use zero interest policy commitment, change the component and scale of balance sheet as the operational strategy of QEMP. This paper summarizes the research paper of QEMP from the theoretical basis, practical effect and economic impact respectively, makes a comment on the existing research literatures, and looks into the further research on the QEMP. This paper summarizes and reviews the basic theory of QEMP from the liquidity trap, zero interest bound to the operating strategies, and reviews the effect of QEMP from stabilizing the financial market,increasing output and raising prices respectively, sums up the impact of QEMP and the research prospect at the same time.Further digging the basic theory of QEMP is one of the highlights of this paper. Recalling the development history of the world economy for nearly30years, we can find that the problem of depression-prevention is far from resolved. The return of depression economics is becoming the consensus of the economic profession. The Great Depression in the1930s gave birth to Keynes’ Liquidity Trap, Japan’s lost decade inspired Krugman’s deflation theory, and then the financial crisis in2008led to Bernanke’s quantitative easing monetary policy. QEMP includes three pillars:(1)taking the reserve amount of financial institution at the central bank as the targets of open market operations and maintaining adequate liquidity supply;(2)the central bank is committed to maintain sufficient liquidity supply continuously until reaches a certain economic condition such as sustainable economic growth or core CPI year-on-year growth rate become positive and has sustainable economic basis;(3)the central bank increases the quantity of the government long-term bonds in the open market operation and keeps the monetary base beyond the requirement of maintaining zero interest rate. Zero interest rate commitment, changing the central bank balance sheet structure and scale become the operational methods of the central bank. Extending the trading period of short-term government bands, expanding the operational counterparts and broadening the eligible assets classes in open market operation become the manipulation tools of central bank. The Bank of Japan’s QEMP provides realistic soil for the study of the effect and transmission mechanism of the QEMP. In March2001, the Bank of Japan’s open market operation targets switched from unsecured overnight call rate to the currency amount balance, which marked the beginning of the QEMP. This paper uses the VAR model to analyze the effectiveness of Japan’s QEMP from March2001to March2006.The results show that Japan’s QEMP has a significant impact on output. It also has some impact on price, but it not so significant as output. After overall analysis of the effectiveness of QEMP, then this paper further analyzes transmission mechanism of QEMP from the interest rate channel, the bank lending channel, the asset price channel and the foreign exchange rate channel respectively. The results show that the impact of QEMP is primarily transmitted through the channel of asset prices.The financial crisis in2008and the Fed’s QEMP provide the opportunity for the study of the substance and impact of QEMP. The Fed injected large amount of liquidity into the world economy, forcing periphery countries’currency to appreciate passively, the international commodity prices continuing to rise and the emerging market facing severe imported inflation and assets bubble risks. At the same time, QEMP conceals a huge risk for the United States. High government debts, moral hazard in financial institution, exit difficulties, threatened independence of monetary policy and the worrisome financial situation of Fed, All of which are the very thorny issues the Fed have to face later.The Japan’s QEMP practice has aroused widespread concern in the economic circles, and also opens the prelude to the study of QEMP, which lays solid foundation for the further study of QEMP. Since then, the literature of QEMP is unfolding, and can be described as voluminous. However, since March2001, the Japan’s QEMP practice is just more than a decade, many conclusions remain to be further validated, the research method remains to be further innovated and the theory of QEMP remains to be further developed. Standing on the shoulder of giants makes me have a more detailed and clearer understanding of the research status quo and trends of QEMP. Review of the existing research literatures, we find that foreign scholars’ research results are relatively large, however domestic scholars’research is relatively scare before2008. Although the foreign scholars’ study is much deeper than domestic scholars, but not perfect in very way, which gives me an excellent opportunity to further study the QEMP.At first, this paper deeply digs the theoretic basis of QEMP. The theory is the basis of practice, and the theory also has been continuously improved through the practice. Review of the research literature at home and abroad, we find that most scholars only analyze the phenomenon and practice of QEMP, however the literature that normatively analyzes the theoretic basis of QEMP is very scare. Although some scholars have studied the QEMP, these theories are very scattered and not comprehensive, the logic is also not so strong. So, this paper analyzes, summarizes and sums up the theoretic basis of the QEMP after reading a lot of research literatures. From the return of depression economics, liquidity trap, to the three pillars, operational methods and manipulation tools of QEMP, this paper comprehensively and clearly describes the theoretic basis of QEMP.At second, this paper deeply studies the transmission mechanism of QEMP. Most of the literature makes the descriptive statistic analysis on the effect of QEMP, and just analyzes and summarizes the economic growth rate, CPI index and the unemployment rate. After using the economic model to analyze the effect of QEMP, this paper further studies the transmission mechanism of QEMP. Starting from the traditional transmission mechanism of monetary policy, this paper further analyzes the interest rate channel, the credit channel, the assets channel and the exchange rate channel in order to conclude the mechanism of QEMP.Again, this paper further analyzes the impact of QEMP on the home country. The impact of QEMP on the periphery countries, especially the emerging market countries, is the focus of extensive research literatures after2008. However, very few literatures discussed the impact on the home country. Precisely because of this, this paper uses a lot of pages to explore the impact of QEMP on the home country, but the dissertation of the impact on the periphery countries is relatively rough.At last, this paper builds the research framework for the QEMP for the first time. Review of the research literature, we find that the literature that studied the QEMP is very scattered. A lot of papers concentrate on the effect of the QEMP, but very few papers study the transmission mechanism of QEMP, especially, very rare papers systematically study the theoretic basis of QEMP. The literature that researches the impact and exit of QEMP begin to gradually increase after2008. So this paper starts from the theoretic basis of QEMP, deeply analyzes the effect and transmission mechanism of QEMP, then researches the substance and impact of QEMP, finally this paper explores the exit of the QEMP. Because of space limited, the part that elaborates the exit of the QEMP is not independently chaptered, much analysis of which integrates into the fifth chapter. From theoretic basis, practice effect, transmission mechanism to economic impact and exit mechanism, this paper builds the research framework of QEMP. Of course, the framework remains to be improved and perfected.Although this paper further explores and studies the quantitative easing monetary policy based on the previous research literatures, these exploration and study attempts to compensate for the deficiencies and shortcomings of previous study. The authors also paid a great of effort and pain. However, because of my little talent and less learning,knowledge and ability limited too, many shortcomings left during the writing of this paper, perhaps this is where the value in this paper(if any), solving the previously left issue, at the same time, raising the question for latter research,also providing reference and ideas for future research.