Impact Of Quantitative Easing On The Uk Economy Economics Essay
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This research proposal focuses on the concept and practice of Quantitative easing in context of UK's economy. The literature consists of elaboration of the need of using Quantitative easing to save Britain economy from recent global economic crises. It further explains the impact as well and covers all major areas which can have its effect.
Economic downturn leads to apply the Quantitative easing which can be done through asset purchasing, lowering the interest rate and most importantly injecting cash directly into the economy. Recently world has suffered global economic recession which forced almost every country to take appropriate measures such as supplying more money into the economy. The recession badly effected UK's economy among all. Monetary Policy Committee adopted Quantitative easing measures under the authority of Bank of England in order to stabilize the economy and save UK's economy from the economic crisis. It is the role of Bank of England to maintain the stability of UK financial system and its economy. In the recent economic recession the new banking act has increased the powers of Bank of England which have authority to bank financial services and the market to actually deal with this stress situation.
Monetary Policy Committee decreases the bank rate to 0.5%. In January 2008 the bank rate was 5.50% which continue to fluctuate and finally in 2009 it started with 1.50% and ended up as a reduction to 0.5%. (Source: www.bankofengland.co.uk). They are also focusing to have a low and stable inflation in order to do that a target has been set to keep inflation at 2% by the UK Government. Lowering the bank rate will take time to keep inflation in control. So there is a need to look ahead and decide an appropriate monetary policy.
This leads Bank of England to decide purchasing of assets such as Government and corporate bonds so that the money supply will increase or they will purchase assets from private sector such as insurance companies or non-financial companies by crediting their account. Money can be in two forms either cash or bank deposits so in other words the focus in this policy will be to increase reserves of banks and the spending which ultimately lead to more flow of money in wider economy.
According to Monetary Policy Committee the asset purchase will decrease the issues about liquidity and it will give companies sort of confidence so that they can borrow directly from the capital market. The Committee also defined a measured criteria related to supply of money so that it cannot increase beyond a certain limit and if the inflation target set by the Government will rise then monetary policy will use strict measures such as increasing bank rate or selling back the assets purchased to the market. (Source: Monetary Policy: www.bankofengland.co.uk)
Rational of the Research topic:
The research on this proposed topic is selected because of my own personal interest in the financial and economic systems especially of UK. The recent recession has affected everyone directly or indirectly the people suffered because of unemployment and low incomes. This actually directed my interest to know about the crises and the measures taken by authorities. It also provoked me to explore and gain comprehensive understanding about Quantitative easing.
My previous research proposal during study was related to economic system of Pakistan and the role of State Bank of Pakistan this also initiate my interest in topic . After coming to UK the crises of economy was selling like hot cakes so it forced me to read articles and journals about the crises. This actually gave me an insight about the measures taken by Bank of England.
Most importantly this research proposes the examination of a basic question: how successful Quantitative easing is in the stability of UK economy? Apart from this question it actually raises other questions as well such as: How the decrease in bank rate will reduce inflation in UK? What will be the criteria to control supply of money if it increases more than desired target? How will we know if the asset purchases are working? Will the performance of the banks increase? Will it be easy for companies to borrow direct from the market?
The basic objective of this research is to critically evaluate the Quantitative easing and its impact on UK economy. By analyzing of this process the research will intend to gain broad knowledge and insight about different monetary policies implied by Bank of England. How Quantitative easing increase the spending for companies and the flow of money which ultimately leads to a stable economy.
The literature provided here is not conclusive because there is more to observe and discover in order to collect and review the literature. The nature of the topic is contemporary and current therefore more literature can be achieved by the passage of time.
Norma Cohen (2009) stated that although Monetary Policy Committee has confidence in their Quantitative easing strategy to boost nominal demand but total lending to businesses further decreases. The consumer credit continued to shrink and uncollectable consumer loans increased.
The Bank of England reported that the growth of money is on its slowest rate since December 2004. The borrowing also showing seasonal decline the size of this decline is more than expected. So Monetary Policy Committee should put more focus on measuring and increasing growth of money. (Source: www.bankofengland.co.uk)
Daniel Pimlott (2009) expressed a view in his article in Financial Times that household disposable income has increased 1.2% in end of December and it has pushed saving ratio to 8.6%. He provides the reason in this rise that Bank of England decided to avoid rise in value added tax which ultimately enable people to save more without affecting the power of spending. He presented a view that such quick rise in saving suggests that UK economy may be closer to stabilize.
There are clear signs that economy is improving in Britain due the measures of quantitative easing. The labor market is performing well comparing to the previous quarter and industrial production is rising considering the growth in both manufacturing and services industry because the Bank of England Policy of creating flow of spending and increasing the banks borrowing. (The Economist, November 12th, 2009)
Mervyn King (2009) the Governor of Bank of England said in a press conference in November while presenting quarterly inflation report that UK economy facing delays in balance sheet adjustment. In order to rebalance UK economy needs to get away from private and public sector towards exports. The reduction in exchange rates is helping to smooth this process and the substantial reduction in fiscal deficit is quite clear. The Quantitative easing strategy of purchasing assets is proved handy but it is much smaller.
Andrew Oxlade (2009) a well-known financial analyst wrote an article "Recession Watch". He analyzed the impact of quantitative easing on UK economy and said that although the policy of Spending and Borrowing by the committee is core to get out of the recession but the investment fell and unemployment increases. Inflation is getting a bit high due the increase in oil price. Dr. Ros Altmann (2009) suggested that buying the gilts is not a proper way to ease the recession. Bank of England should emphasis on buying corporate bonds. So operating quantitative easing through buying gilts is not working efficiently. She further presented a view that buying gilts will increase the leak of money into overseas bond markets. But if they put more emphasize on buying corporate bonds then they can get money directly to the companies.
Edward Hadas (2009) in his article on Telegraph analyzed that although the loan losses are increased but the aid provided by the Bank of England is massive which include minimal interest rate and sufficient supply of money. This is actually helping the economy to get a way out of recession. The liquidity push has given confidence to the investors in the form of cash to put in the market. Although the GDP was falling but now it has fallen less in few recent months. Economy is declining in a moderate way that suggests that the growth is coming back slowly. This is all due to the measures taken by the authorities such as Bank of England. Richard Taylor (2009) argued that there has been a major increase in business accounts in the banks. The new businesses are being started very quickly and it has exceeded the figures in last year. Richard Blackden (2009) analyzed the Delloitte Warns review and said that figures shows that the economy shrinks than the previous quarter and fears that the economy could go back to the recession.
The analysis of Quantitative easing and its impact on UK economy is based on further research only through this we can analyze the impact and its nature. There is a need to look through the process in order to evaluate the affect. That's why the nature of this research proposed exploratory rather explanatory. The theory actually examines the continuity of the process and measures the trends in the market and the economic system of UK.
There is also important to adopt qualitative research approach in order to include some focus groups like general population and banks to know the progress and relief. Observation method can be done in order to know the content and statistics about the topic. In order to know the effects of quantitative easing in the economy causal research is also handy so that the effects of different policies implied by Bank of England can be analyzed.
A combination of in-depth interviews by financial experts and analysts and method of observation can also be used in order to address the research proposal. Interviews of experts can have structured interview based on specific questions and should include predetermined questions. There is a need to have a clear idea about the topic and should analyze facts and figures published by different financial institutions of UK.
Data Collection Methods:
While collecting the data through observation method the researcher needs to address the right source for that. The researcher will need to consider and monitor the continuity of the process of quantitative easing and could gather data by different articles and newspapers. The researcher also has to look through the facts and figures on different short periods of times. This can be done by obtaining data from bank of England quarterly report which includes all the figures related to topic. The focus should be on bank's performance and overall economy considering the unemployment and inflation and household income. In order to know that quantitative easing is really working there is a need to consider previous quarterly reports as well and then do a comparison. This will help to simply and precise the data collection and the data collected by this will be valid as well.
Moreover in-depth interviews can be done through telephones or meeting directly to financial experts to gather their opinions. Telephones interviews should be recorded on tape and while conducting direct interviews the important points should be noted down on paper. In such data collection method, interviewee is given the opportunity to talk freely about the topic. The interviews duration should not be more than half an hour for utilizing time a set of questions should be prepared prior to the interviews.
Analysis of Data:
The research consists of in-depth interviews as well as considering the observations and obtaining the facts and figure in the analysis. That is why the research purposes both quantitative and qualitative methods of data analysis. Obtaining the facts and figures through observation will require managing the data and then statistical analysis. This can be done through using the Microsoft Excel spread sheet which can show graphical presentation of the data as well.
In-depth interviews of experts will include qualitative approach based on the theory purposed by Miles and Huberman (1994) consists of components, procedures and outcomes. Components will include gathering data then its reduction and verification procedures include the coding, categorization, comparison and interpretation and outcomes gives explanation and description of the results.
The most of the literature review will be obtained from newspaper articles and television news and press conferences. The fieldwork will include extensive use of internet facilities and also telephone. The interviews will include telephonic and direct meeting depending on interviewee convenience and preference. The topic of research is actually contemporary issue that's why newspaper reading is essential on regular basis.
As there is need to conduct the interviews of financial experts so the researcher need to organize visit to some large banks such as Lloyds and Barclays. The visit can be to the head offices of these banks or to the main branches where the researcher can interview any senior correspondent of the bank. There is a need to get appointment prior to the visit.
Gantt chart: (Week Commencing 18 January, 2010)
Strategy & Method
Collection of Articles
Develop Questions for interview
Interview to Lloyds, Barclays financial Analysts
Draft to supervisor
Print & Bind
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