Quantitative Easing free essay sample

A critical review of quantitative easing and its impact on the UK economy Research proposal â€Å"A critical review of Quantitative easing and its impact on the UK’s economy† Research background (Theory, concepts, Key issues, problems and researchable questions) Theory- During the recession flow of the money in the market is very less, hence central bank lend the money to the borrowers at low interest rates, but there is limitation they cannot go beyond zero percentage, hence central bank do â€Å"Quantitative Easing† that is printing of money and boost the money into market by purchasing the assets and buying the gilts or government debts. Concepts- the main concept behind the Quantitative easing is to boost the money into the market and keeping maximum inflation rate targeted 2 pc by BOE with relative growth in GDP and stop quantitative easing when inflation reaches the maximum limit and withdraws the money from the market by selling the assets and gilts. We will write a custom essay sample on Quantitative Easing or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Key issues and problems- The main issue is UK Economy is not recovering even after boosting 200 billion pounds with the interest rate 0. 5%, inflation also noticed about 3. 1% and GDP under contraction of -5. 2% in year July 2009. the question is whether monetary policy of BOE is correct? The problem is government is planning to put more 25 billion to 50 billion in 2010 and inflation rate increases if printing more money and pound loses its value against dollars and Euros . When the QE will end? Will the bank losses if QE stops? Research objectives- In this secondary research report I am going to find out why UK economic is not recovering, what are the factors hold the growth, what are the government next steps in QE or any other alternative solution to QE, how much time it will take to recover and when it will end. This will give me depth knowledge about QE and future planning of BOE on UK economy. I will use conclusive descriptive research method to ensure my research objectives. Research questions- 1. What is effect of QE on inflation and deflation? 2. Does inflation and printing of money affects the value of currency or exchange rates? 3. Is printing of money reliable? 4. Will quantitative easing work in UK? 5. Is UK economy recovering by QE? 6. What are the alternative ways to improve UK economy? 7. Is monetary policy of BOE is effective? 8. When QE ends in UK? 9. Will banks in losses when QE ends? Literature review- According to the special reports by actionforest. om published in their websites on March 08, 2009. Bank of England has announced quantitative easing in order to overcome the recession and improve the UK economy. BOE has decided to put 150 billion pound into the market through quantitative easing i. e. printing of money. They have decided to buy assets of 50 billion pounds, commercial bond gilts of 75 billion pounds. They have cut down the interest rate almost to 0. 5pc and targeted to keep the inflation rate 2pc. Authors has research on the impact of quantitative easing on the inflation and growth i. e. GDP rate. As per the research it has been seen that increase in money supply and reduction in the interest rate to 0. 5pc inflations increases and the value of pound goes down against the dollars and Euros. The author has used quantitative conclusive research method. â€Å"The fear of printing too much money† article written by Chris bowl of BBC radio current affairs, published on 5th march, 2009. Mr. Darling chancellor of UK said that â€Å"emergency money printing conjures the most disturbing of ancient and modern anxieties of politicians ruining a currency, and there by utterly undermining a societys stability. (Chris bowl, 2009). As per Mr. Darling now days nobody prints money it is just done electronically. Fear factor of Printing of money is the inflation and value of currency goes down. The great example is the Zimbabwe who has printed the money without any quantitative easing policy and resulted in hyper inflation of 230 million percents. Bank note of 100 trillion was printed which has no value. Similarly in Germany hyper inflation happens in year 1920. It’s lesson from the history about avoiding too much printing of money. Authors have used qualitative exploratory research method. Matthew Lynn economist explains â€Å"four ways to pull an economy out of the recession† in his article published in their websites arabianbusiness. com on 25th November, 2009. Author has research on the UK economy and found that GDP growth is negligible i. e. 0. 4 pc drop noticed in Q3 results. He found that policy of the UK government is not working as already 200 billion pounds already boosted into the market. He suggested UK government has to change the policy in order to recover recession. UK economy is stuck in the borrowing and debts. House hold debts are highest amongst all other countries. It has highest debts last year 14. 8 B pounds noticed in September. According to the research it has been seen that government is printing money and increasing banks reserve and landing money at lowest interest rates still there is no change in economy. Value of pound is also lowering compares to euro and deficit of the debts are also high. According to author he suggested four ways to improve economy â€Å"It must curb the budget deficit, support the pound, stop printing money, and cut taxes. † (Matthew Lynn, 2009). Author has used quantitative data and research method is conclusive descriptive. Chris Giles article â€Å"To be continued QE or not to be continued QE† published in financial times on 4th November, 2009, financial times. Economist questions whether QE will be extended by the BOE or they will stop. As per his research and the views of the other economist BOE is going to boost more money into the market in next three months of 2010. In his research he finds why there is uncertainty in the monetary policies adopted by the UK. Banks are creating the money and landing in the market but it doesn’t mean that it will help in QE. Ending of QE is depend when MPC (monetary policy committee) realise it’s enough, which is based on the inflation and GDP growth. Bank unsure about their capacity on boosting a money, as per the analysis rise in the inflation above the targeted 2. 0 pc has been noticed which shows there is no scope for QE otherwise it will result high inflation. Paul Fisher, the head of markets, suggested â€Å"There would still be a â€Å"quite a  significant† degree of spare capacity over the forecast horizon. † Author has used qualitative exploratory research method. Article of Jeremy Warner â€Å"Worried about the lack of growth not more quantitative easing. In telegraph news paper published on 02 Nov 2009. In his research he has explain the issue on â€Å"Is Quantitative easing helping to stoke a renewed and dangerous bubble in asset prices? This is just one of the questions the Bank of England must attempt to answer in coming days. †(Jeremy Warner, 2009). Author ha s given the answer ‘yes’. QE is all about the stoking of assets price, for growth and development bubbles in assets are not advisable but it is not dangerous until escorted by the leverage, use of the debts. â€Å"To bears, QE builds another house of cards on top of the debris of the old one. To bulls, QE is merely a way of kick starting a stalled engine so that normal economic activity can be resumed. † (Jeremy Warner, 2009). Author has used qualitative exploratory research method. Owen F. Humpage and Michael Shenk explain success of quantitative easing policy in their article published on 12th October, 2009. In his research he has explained how QE works to pull economy out of recession and the example is Japan. Economy slows down in 1995 as its facing the problem of deflation. After various actions Japan has introduced quantitative easing in year march 2001 to 2006,. BOJ has formulate three major policy of quantitative easing i. e. creation of money and increase the reserves of bank, keep interest rate almost to zero percentage and show the significant change in the bank’s balance sheet. According to the policy BOJ has planned to end quantitative easing when inflation reached to zero. They have more stressed on inflation rate rather than sticking to the zero bound interest rate and result in inflation increases rapidly but it does not make difference as they have recovered from deflation and they have stopped the QE when inflation is positive. The author has used quantitative conclusive research methods. Evaluation of methodological issues of literature and Methodology – Matthew Lynn, Action forest . com, Owen F. Humpage and Michael Shenk economist of Federal Reserve Bank of Cleveland authors of literature review have used quantitative data and they have used conclusive descriptive research method because they have given the evidence of analytical data and explained in with description, research is formal and structured and sample is large and representative. Chris bowl of BBC radio current affairs, financial time’s economist Chris Giles and Jeremy Warner economist of telegraph news paper, has used qualitative data in their research and method is exploratory because research is flexible and unstructured and data is not showing any description of analytical data. In this report I am planning to use quantitative data and conclusive descriptive research method as I need to see in depth about the debts of the BOE and detailed about the boosting of money during QE, interest rate , inflation rates, assets price, GDP growth over last 5 years and during QE. I want to find the reasons of UK economy not recovering, when it will end and find alternative way of QE. I want to use my finding as input for decision making. Types of the data and sources- I am going to collect the primary data for my all research questions, I will gather data from personnel interviews of representative or manager of the BOE and MPC (monetary policy committee), Economist interviews , electronic survey i. e. from internet and emails, electronic observation i. e. news on television and collecting interviews from newspapers and magazines. These methods will suites my research because it will give answer to all my research questions. My study is intended to generalisable as per my research question I will choose stratified sampling technique. Yet I have not visited any organisation government firm and no interviews conducted but I have planned to visit BOE and MPC to take the interviews of the mangers and representatives, I don’t have agreement for access from host organization as it is my academic research. Data gathering techniques- I will collect the data by visiting the BOE and MPC and interviewing representatives and mangers, collecting the company documents for the research by personnel survey, electronic survey on internet and through mails, and collecting the economist and experts view from their interview in newspapers and television. I have selected this technique because I can easily get the data relevant to my researchable questions and its suites to my questionnaire. I have not tried this method as pilot study. Data analysis – As my data is quantitative I have planned to use stat technique for e. . different charts like bar chart, histogram for showing comparative study of GDP growth rate, assets purchase and sales and national debts over before five years and line chart for fluctuation in inflation rate over the period of time for this have also planned to use computing software package SPSS which take less time and give quickest results . this will suites my research as it is quantitative des criptive, so the numerical data will be very high as it’s study on whole UK economy. Competence and plans for enhancements- I have adequate knowledge but I am not much skilled as compare to the research experts for various techniques I have planned for my research, as I am under academic study programme. I could not provide any evidence for my research skills. To achieve adequate standard and acquire necessary skills I have planned to go under training programme of researchers helping them as apprentice in their research and taking help of my college professors. I will meet the required standard and skills before beginning of my actual research. Examples-