Quantitative Easing - get ready for the new media buzzword

Quantitative Easing. Get ready for those two words to dominate the press over the next 18 months as the Federal Reserve attempts to cut off the credit crunch. As the LIBOR stymies the efforts of Fed rate cuts they have limited arrows left in the quiver, and Quantitative Easing is going to look more and more attractive.

What is Quantitative Easing? Ask the Bank of Japan. It’s taking interest rates to near zero and flooding the markets with manufactured liquidity to promote private lending. Ask Japan how that’s worked out for them…

From a 2001 paper on the Bank of Japan’s Quantiative Easing policy:

The BOJ initially switched from the usual approach to expansionary monetary policy””namely, a reduction in the target short-term interest rate””to quantitative easing because by that time it had been pursuing a target very close to zero (0.15%). The BOJ argued that, at an interest rate so close to zero, further nominal interest rate target reductions were constrained to be small, as under normal circumstances nominal interest rates are bounded at zero. As a result, the possible stimulus obtained through further reduction in the interest rate target was likely to be limited.

Under quantitative easing, the BOJ conducts open market operations aimed at increasing the money supply and reducing long-term interest rates. The recent intensification of the program has come in a number of forms. The increase in quantitative easing involves the BOJ engaging in open market transactions aimed at increasing its balance of current bank accounts held at the BOJ.

Oh yeah, and don’t count on that to work either:

The data provide little evidence that the new steps taken by the BOJ are having far greater effects than previous efforts. There has been little downward pressure on long-term nominal rates in Japan since the inception of the quantitative easing program.

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