Alec V. Boyajian

Understanding the Effects of Quantitative Easing

This article seeks to demonstrate the fundamental properties of quantitative easing (QE) with historical examples and data from the U.S. and Japan. I focus on both positive and negative consequences of QE, which include fears of inflation, moral hazard, and liquidity effects. Without making policy prescriptions, I impartially conclude the benefits and drawbacks of historical examples of QE. Drawing from the abundance of data, I clarify why QE is an asset swap and not a mechanism of money creation, thus dismissing claims that QE prompts hyperinflation. In terms of drawbacks, I warrant the moral hazard that QE can cause when the Federal Reserve fails to disincentivize poor lending behavior by financial institutions. Overall, QE is an evolving unorthodox branch of monetary policy, and its benefits and shortcomings are becoming clearer as policymakers continue utilizing it.