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The Possible Tragedy of Quantitative Easing: An IS-LM Approach

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  • Kui-Wai, Li
  • Bharat R., Hazari

Abstract

The object of this paper is to demonstrate the possible risks of quantitative easing in the long run. The analysis is conducted in the conventional framework of IS-LM curves in a sequential model, which assumes that the independence of supply and demand curves does not necessarily hold. It is established that this lack of independence coupled with a very flat (or kinked) IS curve may lead to falls in income in second period as a consequence of quantitative easing. Such easing may alter the behavior of investors who get encouraged to undertake very risky and leveraged investments. Thus, short term gains may be outweighed by long term losses from quantitative easing. In some cases such easing may create bubbles in the economy, for example, in the housing and stock markets which collapse at some point in time.

Suggested Citation

  • Kui-Wai, Li & Bharat R., Hazari, 2015. "The Possible Tragedy of Quantitative Easing: An IS-LM Approach," MPRA Paper 64652, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:64652
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    File URL: https://mpra.ub.uni-muenchen.de/64652/1/MPRA_paper_64652.pdf
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    References listed on IDEAS

    as
    1. Sebastian Schmidt, 2013. "Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1335-1350, October.
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    4. Anna J. Schwartz, 2009. "Origins of the Financial Market Crisis of 2008," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 19-23, Winter.
    5. Pedro Gomis-Porqueras & Daniel Sanches, 2013. "Optimal Monetary Policy in a Model of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 701-730, June.
    6. Efrem Castelnuovo, 2012. "Estimating the Evolution of Money’s Role in the U.S. Monetary Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 23-52, February.
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    More about this item

    Keywords

    Interest rate; quantitative easing; IS-LM framework; non-independence of supply and demand curves;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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