Quanitative Easing

What is quantitative easing (QE)? Quantitative easing is an unconventional monetary policy implemented by central bank. It is implemented by buying large amount of assets to lower the interest rates further out of yield curve. Quantitative easing works usually after the conventional monetary policy is found ineffective, because the interest rate is close to or at zero, this is also known as liquidity trap (Krugman, 1998). Hence, quantitative easing works by the Fed basically creates the money to inject into the economy and once household or companies use this money, it will boost the economy. Buying large amount of bonds and assets tends to rise up the prices and the excess reserves in the bank. The higher prices of assets lower the yield and hence the cost of borrowing will also be driven down. This happened due to the Fed is buying mortgage-backed bonds and this action has directly lowered the cost of buying a house. When the prices of assets go up, some investors will switch to another bonds and directly push up the prices of the bond. The yield is lower making the bonds are cheaper for the companies to borrow. How will this help the economy? Since the cost of borrowing is lower, it will usually encourage the bank to lend more. Consequently, employment rate will go up and if this buying bonds process is constantly happening, there will possibly be an expansion in the labour market. QE implementation will improve the balance of payment by declining the current account deficit because imports will decrease while exports increase. This paper will discuss the expected economy impacts of QE in China.
The objective of quantitative easing is to reduce long-term interest rates in order to spur economic activity (Dudley, 2010).   The first quantitative easing which is QE1, was presented from the year 2008-2009. The Bank of Japan used the expression “quantitative easing” for the first time and set the goals of reserves available to the...