Quantitative Easing (Pros and Cons) Essay Example | Topics and Well Written Essays - 1250 words

Quantitative Easing (Pros and Cons) - Essay Example main aim of quantitative easing is to inject money into the economy to stabilize nominal spending by purchasing assets from private or public sector. When the government uses their new central bank currency to purchase resources, it boosts the quantity of central bank currency held by financial institutions which in turn boost the sum of deposits retained by firms and households. The increase in the amount of assets held by firms and households increases spending which is healthy for a stable economic system. Since central bank is the sole supplier of the currency in circulation, it takes money in the form of reserve balances held by banks to make payments between different banks. Benford argues that such a scenario was witnessed in in England in order to reduce the rate of inflation to protect consumers from economic crisis and it succeeded to some extent. According to Benford, the bank may decide to generate this money electronically simply by increasing the balances on the reserve account so that it credits the bank reserve account when the bank purchases an asset. The central bank can also decide to purchase asset from a non banking institution by paying the amount directly via the seller’s bank thereby crediting the reserve account of the seller’s bank (Berger & Weber 36). By so doing, the asset of central bank increases which consequently increases the assets of commercial banks and the non bank institutions concerned. This ultimately leads to an increase in assets prices and spending and consequently reduces the rate of inflation to desired levels (Berger &Weber 37). Economists argue that this is a perfect method of expansion of supply of central bank money without increasing the rate of inflation in an economy (Benford 3). Controlling inflation is not easy due to pressure from financial hawks who are always interested in seeing high interest rates (Krugman). Since quantitative easing involves large amounts of currency, there needs to be se t properties to procure for it to be successful in the short term. Most of the purchases go to public organizations with private organization receiving less purchase with the aim of improving the conditions of the corporate credit. The injection of government money into the economy is helpful in increasing the liquidity in return for the assets which helps to improve the balance sheet of the private sector households and firms (Berger &Weber 37). Since money is highly liquid, its injection into the economy increases the buying of goods and services hence is a good manipulating tool for inflation. Purchase of assets by the government increases the prices of assets reducing the cost of borrowing from household and companies thus resulting to higher consumption and investment spending (Benford 3). When companies have cheaper access to