Allison Dolan, Javier Ramos, Alex Ouligian, Bianca Tomkoria 1 March 2011 IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 A monetary policy of central banks that entails buying bonds and other assets in order to inject liquidity to the market.  Process:  The central bank electronically gives itself a set amount in its own account.  Buys bonds and other assets from commercial or investment banks IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 Similar but distinct from QE  Buy sovereign debt  Stabilize “dysfunctional” market segments  Restore monetary policy transmission mechanisms  3 and 6 month liquidity cycles  Liquidity re-absorbed through other ECB operations IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 Used when interest rates are near zero  When the central bank is willing to risk inflation  When additional liquidity is needed, i.e. to prevent a liquidity trap IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 Used by the major central banks during the Financial Crisis  May 2010 – Securities Asset Programme  2007 – US Fed Quantitative Easing IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 IMF: QE increased the stability of international financial markets during the Financial Crisis  Restore some confidence in financial sector IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 ECB balance sheet is more risky in the case of Euro member default  Banks and other institutions don’t circulate the newly acquired cash  Banks invest their cash overseas or in speculative markets  Prolonged low interest rates may lead to financial bubbles in the future  Decreases fiscal agility of ECB in other areas Quantitative Easing SMP  Possible inflation risks, especially if GDP growth does not keep up with the new issuance of debt  Banks and other institutions don’t circulate the newly acquired cash  Banks invest their cash overseas or in speculative markets  Prolonged low interest rates may lead to financial bubbles in the future IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 Escaping inflation…  Ability to buy cheap imported goods ▪ Eurozone might not be in the best position to do this because much of member states’ imports are from other members  When liquidity goes toward creating an asset bubble IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 Balance sheet has to be seen from a central bank perspective  Preventing future crises and stabilizing markets may involve a more united fiscal policy  Balance sheet has to be seen from a central bank perspective  Preventing future crises and stabilizing markets may involve a more united fiscal policy German central bank and government are very much opposed to this idea "What Spain advocates is that if we have a single currency, it's not enough just to have a central bank, a single central bank. It's not enough to have a single monetary policy. We also need to have a common economic policy" IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

 Asset purchase programs have become an important tool for central banks for controlling more complex economies  12 – 18 month window to see inflationary effects  Don’t have much empirical evidence for the effects of these types of programs ▪ Japan in the 90s only strong case IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion

And now, a lesson from South Park… How things REALLY get decided at the Fed...

 Chu, Dian L. From Quantitative Easing to Stagflation? The Market Oracle, November 02,  Conway, Edmund. Policy of 'printing’ money is still not yielding results. The Telegraph, May 07,  Eurostat Eurozone Annual Inflation.. February 28,  Inman, Philli. ECB tries to calm markets by promising unlimited liquidity. Guardian, December 2,  Iyer, Raman. Jose Luis Rodriguez Zapatero Top News Law.. January 31,  Sharma, Shalini. Angela Merkel Top News.. January 13, Sharma IntroductionAsset Purchase Programs+/- of ProgramsRisk MitigationConclusion