The Third Round of Quantitative Easing and Its Impact on US and Global Market

Table of Contents

Introduction2

Discussion3

Literature Review3

Quantitative Easing7

Expansionary Monetary Policy11

Contractionary Monetary Policy12

Overview of the United States Monetary Policy13

Overview of the United States Recent Monetary Policy14

Recent Direction of the United States Monetary Policy15

Market Reaction to Monetary Policy17

Conclusion18

References20

The Third Round of Quantitative Easing and Its Impact on US and Global Market

Introduction

In macroeconomics, monetary policy is an importance tool to Central Bank and is a policy set by the members of Central Bank. It is an economic strategy chosen by government that authorizes Central Bank to regulate and influence the economic activity by controlling the monetary base flow into national economy. The goals of monetary policy are to promote growth of the economy, stability of prices and reduce unemployment rate. Monetary policy can be classified into two categories, namely expansionary monetary policy and contractionary monetary policy. Although, the objective for the two policies is the same, they adopt different approaches in reaching this objective. Expansionary monetary policy is used when a country is facing a recession in the economy business cycle, whereby it increases the money supply in economy system to meet its objectives. In contrast, where there is a peak in the economy business cycle, central bank will use contractionary monetary policy to reduce the money supply in economy system so as to retard the inflation. For example, the United States, one of the top ten richest countries in the world had entered into a recession seen the global financial crisis and faced a slow growth in recent years. The country's Central Bank, Federal Reserve System (Fed) had used two rounds of quantitative easing (QE) to stimulate the economy in hope that the recent direction of the nation will be stimulated by the monetary policy. This essay will discuss the recent direction of monetary policy in the United States with an overview of the monetary policy, the recent years of monetary policy and its direction in the short-run and long-run. Finally, it will discuss the impact of the policy and market reaction before ending with a conclusion.

Discussion

Literature Review

The Monetary policy committee of the Bank of England (MPC) initially responded by putting measures in place aimed at providing the markets with liquidity insurance. The Bank of England brought down bank rates through various stages beginning in October of 2008. By October, 2009, bank rates had reached 0.5%. The government's aim was to raise inflation to a level of 2% and keep it at that level. However, bringing the bank rates down did not solve the problem of unceasing deflation. The government announced that it would put further measures in place to confront the critical financial situation that was weighing down on the country. It announced that it would achieve this through a program that involved purchasing financial assets. The said policy was quantitative easing (Nakazono et al., 2011).

The Monetary policy committee resolved that it would purchase both private- sector and public-sector assets. The procurements were to be done using reserves ...