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The Transmission Mechanism of the Quantitative Easing Monetary Policy

Author: DuDeMing
Tutor: LiuXiaoXin
School: Nankai University
Course: Western Economics
Keywords: quantitative easing monetary policy stimulus effect spillover effects virtual economy the transmission mechanism
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Type: PhD thesis
Year: 2013
Downloads: 131
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Abstract


In2008, the U.S. subprime mortgage crisis quickly turned into a financial crisis, and spreaded rapidly around the world. In response to the severe impact of the financial crisis on the U.S. economy, the Fed quickly transferred to the benchmark interest rate level of zero interest rates, and the introduction of this unconventional monetary policy of quantitative easing monetary policy.Quantitative easing monetary policy originated the loose monetary policy operations in the Great Depression. The rapid post-crisis recovery process and the monetarist view that the effectiveness and feasibility of the quantitative easing monetary policy. Werner (1991) of The University of Southampton in the United Kingdom first proposed the concept of quantitative easing monetary policy. It is not cutting interest rates, nor "printing money", but to achieve the "credit creation" by quantifying the scale. Quantitative easing monetary policy was first used in Japan in2001during the recession, when the economy was in a liquidity trap and the willingness to invest and the demand were very low, and the traditional role of monetary policy was extremely limited, so non-traditional quantitative easing monetary policy came into being. It enriched and deepened the theoretical system of quantitative easing monetary policy. Non-neutral monetary theory, Krugman’s "liquidity trap" theory, the financial accelerator theory, Minsky’s financial instability theory are the theoretical basis of quantitative easing monetary policy. The base model which this thesis draws upon is the model developed by Gilchrist et al (2009) who augmented the Smets and Wouters (2007) with a "financing premium". The augmentations of GOZ model include a signal effect for the provision of excess reserves, a signal effect and portfolio rebalancing effect and a variety elasticity of the external finance premium to entrepreneurs’net worth.In the theoretical study of the international transmission mechanism of quantitative easing monetary policy, economic capital flow equations mean that changes of any country’s money supply will result in a net outflow of capital equilibrium. On this basis, it concludes that domestic monetary aggregates of a country are decided by both M2and net capital inflows. Then the influence on the price level and the level of asset prices are got by the Fisher equations with the introduction of the virtual economy (Liu Junmin,2001).The paper analyzes the transmission mechanism of financial market stability and economic stimulus effect of the quantitative easing. In the financial crisis, the Fed’s quantitative easing monetary policy was biased in favor of maintaining the stability of the financial market policy objectives through the balance sheet channel. The economic stimulus effect of quantitative easing is that it can stabilize financial markets, then open up the monetary policy transmission channels of monetary expansion, and thus stimulate aggregate demand through credit expansion, inflation, devaluation effects. The empirical test is made to test Fed’s quantitative easing monetary policy’s effect on the money supply, the gross demand and exchange rate. It proves that the economic impact of the expansion of the money supply is achieved through prices, capital markets and real estate markets. The global financial crisis is rooted in economic virtualization. The U.S. quantitative easing monetary policy stimulus effects are evaluated from the point of view of the virtual economy. It analyses the the interaction between virtual economy and real economy and then the interactions between virtual economy and capital monopoly. And then it points out the system causes of the financial crisis and limitations of quantitative easing monetary policy.As the world’s most powerful economy and the international reserve currency issuing country, the targets also include global goals. That is, the global optimum configuration of the capital of the United States. In this paper, the Fed’s objectives and its impact are analyzed. Through the establishment of quantitative easing under this global economic game model of the U.S. economy, Europe, Japan and other developing economies in the monetary policy options of the game as well as monetary and fiscal policies in the portfolio selection of the game, reveals the U.S. policy to other countries in terms of policy choices. Empirical Analysis on the spillover effects of the Fed’s monetary policy, analysis of the impact of the increase in the money supply on the price of capital BRICS significantly, which gave birth to the asset bubble in developing countries, brought to the capital markets instabilities. The second is to analyze the significant increase in money supply BRICS price shock effect, this creates uncertainty for the economic development of developing countries, and affects the independence of monetary policy in these countries.Under the competing in the world’s major developed economies to implement quantitative easing monetary policy, it analyses the background, operating characteristics and effect comparative analysis of the quantitative easing process of the world’s major developed economies of the United States, Japan, the United Kingdom and the euro area. And then it makes a comprehensive analysis of the impact of the global economy.China’s economy has been greatly affected by the implementation of quantitative easing monetary policy situation in the world’s major economies led by the U.S.China should deal with all aspects of these responses, including safeguarding national economic security, and promoting the reform of the international monetary system, and vigorously promoting the internationalization of the RMB, accelerating the optimization of the industrial structure, changing the mode of economic growth and prosecuting protectionism in order to catch up with strategic goal of self-development model.

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