Abstract

The case discusses the unconventional monetary policy action of quantitative easing implemented in the US post the 2008 financial crisis and its impact on the country’s economy. During the 2008 financial crisis, the apex bank of the US, the Federal Reserve (Fed), cut the overnight borrowing rates to as low as almost zero but failed to spur economic recovery. It then introduced Quantitative Easing (QE) to revive the stagnant economy. The then Fed chairman Ben Bernanke (Bernanke) implemented QE under which the US central bank started buying up longer-term securities in November 2008, called QE1, and later on extended the scheme twice in two other phases: QE 2 and QE 3. As a result, the size of the Fed’s balance sheet (value of assets it held) increased to more than three times its size in 2007 and the country’s economy started showing signs of recovery. However, analysts’ views remained divided on the impact of quantitative easing. Some analysts raised concerns about the spillover effects of QE and others blamed it for causing financial instability and creating an asset price bubble. In October 2014, the Fed decided to withdraw QE while assuring that the US economy had become strong enough to do without it. The overall impact of QE on the US economy was tough to analyze since most of the economists believed that QE had helped to avoid a catastrophic failure of the US economy and the three phases of QE had spurred credit and liquidity in the market. However, some experts opined that the risks associated with QE overshadowed the benefits derived from it.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Analyze the relevance of using QE rather than traditional monetary policies in times of crisis
• Assess the impact of QE on the US economy (an advanced country which implemented QE post the 2008 financial crisis)
• Debate whether such non-traditional measures should be adopted by other crisis-hit countries

Keywords

Quantitative Easing,Credit Easing,Zero Lower Bound,Operation Twist,2008 Financial Crisis,QE1,QE2,QE3,Federal Fund Rate,Ben Bernanke,Unconventional Monetary Policy,Mortgage-Backed Securities,Long Term Securities,Unemployment Rate,Inflation