Nov.06.2012
Ruixuan Ding
Corporate Finance
Quantitative Easing Paper
Introduction
United States confronted serious disorder in financial markets and steep declines in overall economic (Williams 2011) after 2007 financial crisis. The financial crisis in 2007 and its subsequent negative effects greatly challenge the conventional understanding of recession and available monetary policies to handle it. The US and global monetary authorities have been criticized for the excessively expansionary monetary strategies in last decade. (Giraud 2012). In this prospective, the monetary policy after the 2001 recession remained “too lax for too long and this triggered asset-price inflation” (Giraud 2012), not only in US housing but also in …show more content…

According to the basic logic of the Quantitative Easing, the tremendous cash influx into the US market can lower the interest rate, and then the low yield rate will stimulate the investment and the consumption and finally ease the depression. Injecting money directly into market can lead to a series of effects. Open markets purchase of government bonds increases the liquidity of private sector balance sheets. (Joyce, Lasaosa, Stevens, Tong 2010). The private sectors, such as commercial bank, insurance and financial institutions as sellers of the assets now have more money on their balance sheets to run through and spend it to increase growth rate. Or banks can provide more lending to small business and household, make it easier to survive under recession. (Williamson 2012) Moreover, extra money results in assets purchasing in the market, such as housing or company bonds. Then increased market demand will push up the prices of those assets, making the assets owner wealthier by the higher assets prices. (Joyce, Lasaosa, Stevens, Tong 2010) Through higher asset prices, which reduce the cost of getting funds and increase the wealth of assets holders, then further stimulate spending and raise the nominal demand. (Joyce, Lasaosa, Stevens, Tong 2010) Once again, the more borrowing means more