Analysis Of The Spillover Effects Of The United States Of America’s Quantitative Easing Monetary Policy

The2008world financial crisis throws the global economy into recession. Tryingto reverse the economic decline, the United States government has launched tworounds of Quantitative Easing Monetary Policy (QE). In September2012, a thirdround (QE3) was launched and increased in December of that year. The United Statesoccupies the absolute leading position in the world economy. Historical facts provethat US fiscal and monetary policy will have an impact on the world’s economy.Through the study of the QE policy theory, this article analyzes the impact of the firsttwo rounds of QE policy on the world’s economy， especially the spillover effect onChina. This will help us reach a more reasonable estimate of the impact of future QEpolicies, actively prepare ourselves for possible spillover effects, and contributes tothe steady developments of the Chinese economy. The article can be divided into fourparts:The first part summarized the QE policy and its theoretical basis. We started withthe definition of the QE policy. And through a comparison with the traditionalmonetary policies, we demonstrated the different features between the two. Wefocused on the analysis of the QE policy effect on the real economy through fivechannels, including interest rate adjustments, the market expectations of investmentportfolio, asset prices, and currency exchange rate. We also discussed three theoreticalbasis of QE policy: monetary non-neutrality, Keynesian’s Liquidity Trap Theory andFinancial Accelerator Theory of money.The second part reviewed the history of the US QE policy and the difference ofeach round of the QE policy. Through reviewing QE1-2and its implementation effect,we noticed that two rounds of QEs differ in primary goals and contents. Theimplementations, to some degree, made up for the shortage of liquidity, stabilized the US financial system, promote investments and consumptions, and stimulate positiverole on economic recovery. However, the impact barely met expectation. Soon afterthat, US introduced a new round of QE reacting to the "internal problems"(eg. highdomestic unemployment, economic growth slower than expected) and "externalproblems"(eg. international economy slowdown, Europe’s introduction of QE policy).And we have analyzed QE3in terms of its agility, directness and purposefulness.The third part, explain the spillover effects of QE1-2through a large number offacts and data, compares the new features of QE3’s spillover effect. The QE1-2improved short-term financial stability, promote international trade and accelerate theadjustment of industrial structure. But they also formed excessive global liquidity;caused the depreciation of the US currency; hit the export and sovereign assetsdevaluation of other countries; pushed up commodity prices and accelerated inflation.This article also illustrated the new features of QE3’s spillover effect. Firstly, itdecreases as the QE1-2’s effect precipitate. Value determines price. The theoryconstrained the sharply rising commodity price. And during emerging marketdownturn, the wealth-chasing nature of capital will cause the US liquidity output todecrease. Moreover, the law of diminishing marginal propensity to consumeexplains that the impact of QE3on the consumption growth and external demand islimited. Secondly, the impact of QE3tends to be neutral in the short-term and becomenegative over the long-term. It can alleviate the pressure of the emerging market fundsoutflow in the short term, thus leading the US dollar depreciate modestly. This willcontribute to redistribution of wealth, and also create concavity in market expectation.Through the market expectations, the policy could have either positive or negativeimpact on the economic development. In the long run, it could causeRun-on-the-bank effect which is not conducive to long-term development ofemerging markets.The fourth part is the focus of this paper, discussing the US QE policy spillovereffects on China and corresponding policy recommendations. This paper focused onthe negative effect of US QE policy on China and put forward countermeasures. The United States QE policy has double impacts on China’s export: QE raises prices ofraw materials; and the pressure of RMB appreciation. These two impacts have a seriesof negative effects on China’s economy, and will form input-driven or demand-driveninflation. The article put forward four policy suggestions with respect to theseSpillovers Effects:1. adopt prudent monetary policies;2. establish resource forcommodity reserve to reduce the inflation risks of capital market;3. promote theinternationalization of RMB and guide the capital flow rationally;4. strengthensupervision, prevent the inflow of hot money, and reduce import-driven inflation risk.Through systematic analysis, this paper thinks that the US is at the core positionin the international monetary system and the US dollar is the currency of the world.Therefore the US QE policy has very significant positive or negative spillover effectson the rest of the world. Although the expected spillover effect of the QE3is less thanthe first two rounds due to changes in market economic environment as well as thespillover effect of QE1-2’s precipitation, and in the short term it tends to be neutralwith paralytic certainty, but its no upper limit" feature and its tendency to be negativeover the long run must be fully alerted. China must suit the methods to the situationin order to reduce and prevent the negative spillover effect.