The Study Of Macroeconomic Impact Of Fed’s Quantitative Easing

After the financial crisis in2007, the Federal Reserve aggressively implemented unconventional policy tools since the traditional monetary policy failed to conquer with crisis. The Fed has implemented four rounds of quantitative easing policy since November2008; meanwhile, the Fed stressed that they were able to taper the scale of quantitative easing unless that the financial market and domestic economy recovered.The information, including the policy’s background, the stages of implementation, the transmission mechanisms, and its economic impact, will facilitate to understand the unconventional monetary policy and function as a reference for the monetary policy-making.Currently, most scholars argue that quantitative easing policy has positive impact on the financial markets and achieved its goal to stabilize the financial system. However, in terms of the macroeconomic impact, there exits differences. Thus, this investigation on quantitative easing policy’s macroeconomic impact will help to understand the effectiveness and limitations of the policy in the light of zero bound rate.This paper aims to describe the policy objectives, policy instruments, and transmission mechanism under the zero bound rate, discuss the macroeconomic impact by adopting a structural vector autoregression model, and analyze the static and dynamic relationships between six exogenous variables by using the impulse response functions and variance decompositions. Finally, the paper comes up with conclusions and implications behind the quantitative easing policy.The conclusions are as follows:First, short-term nominal interest rate and money supply effectively helps to achieve price stability. Given zero bound rates, the Fed injected liquidity into the market through quantitative easing, thus stimulating the consumption and investment by raising the price level. The current inflation is still below2%target and quantitative easing policy has not resulted into a high inflation in the short run. However, in the long run, the impact of the policy would become weak, and the fluctuation in inflation would be uncertain. Second, short-term nominal interest rate and money supply has not explicit influence on the economic growth and improvement for the labor market. The unemployment rate increased to6.7%, higher than the former6.5%target. Third, relative to the shock from short-term nominal interest rate, the shock from money supply has lower explanations for the fluctuations in the macroeconomic indicators, which implies that forward guidance on short-term nominal rate plays a key role and performs well-aligned with quantitative easing policy. Fourth, fluctuations in the macroeconomic indicators show different sensitivities to the monetary policy shock; particularly, the inflation objective could explicitly reflect the impact of the policy, which implies that the changes in inflation convey more clearly signal than unemployment rate for the monetary authority to adjust the monetary policy.This paper is divided into six chapters. Chapter I introduces the background, significance, research methodology, innovations and difficulties; Chapter II outlines literature review, summarizing the existing literature from the perspectives of the transmission mechanisms and the financial and macroeconomic impact; Chapter III describes the current situation, an overview of the background, the policy instruments, the policy implementation, and the policy impacts; Chapter IV illustrates the SVAR model, variable selection, and data processing; Chapter V explains the empirical test results, including the model identification, the impulse response functions, and variance decompositions; and Chapter VI presents conclusions and policy implications.