Ideas about foreign exchange reserves, central banking and related issues
Wednesday, 6 May 2009
A pictorial comparison of QE in Japan and the US/UK
See paragraphs 27 to 40 of the previous post. In a nutshell, in its quantitative easing period from 2001 to 2006, the Bank of Japan focused on creating a certain quantity of reserves, and largely allowed the market to determine how this should support the price of less liquid and less creditworthy debt (although the BoJ did buy more long term JGBs in its rinban operations than usual, and also made some token purchases of commercial paper and equities). The Fed, and to a lesser extent the BoE, are, by contrast, targeting their asset purchases on particular markets in which they are not normally buyers, notably the markets for mortgage-backed and some other asset-backed securities, and creating reserves as a by-product that the banks are content to hold because it bears some interest.
Update on June 7th 2009:
In an incisive comment on this picture posted on the excellent Worthwhile Canadian Initiative blog, Nick Rowe noted that, since an increase in money supply is believed to eventually lead to an equi-proportional rise in prices across the entire economy (see paragraph 5 of the previous post), the glasses ought to be on a level, connected by straws. That’s right, but then a viscous fluid (like maple syrup) would be needed to represent the time taken for the money injected to spread through the economy, and viscosity is hard to represent in a picture. I guess analogies are rarely perfect!
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