QE And Exchange Rates Analysis

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QE and Exchange Rates Since quantitative easing loosens a domestic money supply, it takes more currency to purchase imported goods or services. This makes imports more expensive, and exports cheaper in the same way that devaluation efforts do. According to PPP, this will make the currency depreciate. Therefore, QE affects the exchange rate. Another stated goal of QE, from nations that have implemented it, is attaining proper inflation rates. Inflation rates are part of “market fundamentals” that can help determine exchange rates as well (Carbaugh, 2013, p. 391). It is important to realize that QE programs affect many different areas of an economy which can contribute to a change in exchange rates. This can help or harm trade, the economy …show more content…
It meas that money in the economy is working for investors and savers. Unfortunately, with low interest rates, money is working for borrowers. This is a good idea in the short term because it creates an environment where consumers can buy houses and cars with low interest rates. However, it can be a bad idea over the long term due to the fact that investments and savings are paying less. The question becomes, why would a person choose to save or invest when the yield would be incredibly low? Hurting Foreign Exchange Rates Cheap money does not come without costs. A surplus of money in a domestic economy can distort foreign exchange rates. Since the US dollar is a “peg” for other nations, and the US dollar declining in value, foreign economies may resort to protectionist measures to make sure that their exports retain value (Mortimer-Lee, 2012, p. 384). Tariffs and non-trade barriers (NTB) can impact the cost of goods and ultimately consumers which can have the opposite intended effect of quantitative easing. QE Dependency Japan is a good example of an economy that continues to refer to QE to fix its economic problems. Economic stagnation there has been enduring, with it lasting in some form for the last two decades. As Japan continues to implement QE policies, it may find it hard to exist without …show more content…
However, time has demonstrated that those fears were purely speculative. Krugman (2014) argues that inflation in the US is lower than the Fed 's two percent target, and also argues that the Fed is very good at keeping interest rates low. Since the inflationary fear of QE has been over stated, many view QE policies to have been successful. Shallower and Shorter The recession that began in 2008 is generally thought of as being resolved by 2009. Although issues such as high unemployment and wage stagnation existed after the recession ended, the US economy returned to growth (albeit at a very slow pace). Bernanke (2012) argues that the recession would have been deeper and longer in duration if the Federal Reserve had not stepped in with QE policies. This revelation alone indicates the success of QE programs. There have been several iterations of QE programs in the US among other nations, and the programs have generally been successful with the main exception being Japan. Unfortunately, nothing is perfectly and absolutely successful, therefore, detractors of QE programs will always have negative aspects to point to. On balance, however, QE programs have been successful in curbing the negative effects of

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