Tuesday, January 22, 2013

On Quantitative Easing

This video (and this guy) is talking about what the quantitative easing is and what its difference is from the other traditional monetary policy, target lending rate.

FRB or Fed, the central bank of the US, plays an important role: it makes monetary policy to create money that people spend on goods and service.

(1)Zero target lending rate(ゼロ金利政策)

This policy is to lower the interest rate at which private banks lend money to each other. Now they can borrow money at the lower rate: it gets easier for them to lend money to business people. Thus they are more likely to borrow money from banks because the rate is lower than before.

However, private banks usually prefer buying safer assets (the treasury bills) to lending business people money (riskier assets). Therefore they don't lend more money to business people but buy more treasury assets.

(2)Quantitative Easing(量的緩和策)

This policy is to buy the assets that private banks hold and the treasury bills. Then private banks now can have more money at the very low cost and they are less likely to buy the treasury bills.

The difference from zero-rate policy is, the Fed buys the bills and the rate the bills offer gets lower and lower. Thus private banks are more likely to lend more money to business people.    

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