1. What is Quantitative Easing (QE) and how does it work?
MBA35 Managerial Excellence
The firm and its environment Francesco Giavazzi
The economic crisis (notes on Quantitative Easing)

3. Mervyn King, Governor of the Bank of England, explains QE

4. The traditional Keynesian (IS-LM) model
investment: Inv = f ( i, Y) i ↓ , Inv ; Y  , Inv 
money market: money demand = f ( i, Y)
i ↓ , mdem ; Y  , mdem 
The Keynesian model when firms pay more than i
ρ = i + x
I = I (Y, ρ) ρ ↓ , Inv ; Y  , Inv 
x = x (capital of banks, capital of firms)

5. What happens when banks’ capital falls?
I = I (Y, ρ) = I (Y, i + x ) When banks’ capital ↓ , x  and the IS shifts down

6. QE brings, x ↓ and the IS back up
QE means that the central banks buys loans from commercial banks paying either cash or TBills
QE brings, x ↓ and the IS back up

7. But QE may not be enough to avoid the liquidity trap

8. Central banks and the crisis Central Banks Total Assets
Policy Rates
(in percent)
Central Banks Total Assets
(index, 1/5/2007=100)
Lehman
Brothers
U.K.
U.K.
Canada
Euro area
U.S.
\\DATA1\WEO\PPT\2009\WEMD\4Apr\Policyrates.xls
\\DATA1\WEO\PPT\2009\WEMD\4Apr\CentralBanks_TotalAssets.xls
U.S.
Euro area
Canada
Japan
Japan
4/21
4/17 8

9. The Fed and QE

10. QE has worked a measure of x: spread between corporate and Government bonds