Will Quantitative Easing Enhance or Drain the Availability of Funds to Financial Markets?

This chapter challenges a commonly accepted view such that the increase in monetary supply aiming to lower the market rate and/or aiming to ease liquidity conditions would encourage the banks as financial intermediaries or the investors as fund providers to provide more funds, which results in stimulating the macro-economy. This chapter suggests that there is no clear-cut mechanism in the economic theory for underpinning the commonly accepted view upon which the Quantitative Easing policy is based. This theoretical analysis suggests that there may exist an appropriate level of market reference rate, which can encourage the investors to absorb the relatively wider range of credit risk in the bond market. Extremely higher market rate would discourage the borrowers to raise funds, while lower market rate would drain “risk” funds in the bond market. In this context, the appropriate level of market rate may stand on a narrow range of the kind of “knife-edge,” though the level per se does not always guarantee the optimal allocation of financial resources.