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In the wake of the financial crisis of 2007, the largest economies of our times struggled hard with adverse economic shocks. Several central banks (CBs) employed their conventional monetary policy tools to their limits and beyond. When failing in their attempt, unconventional monetary policies got gradually introduced in order to stimulate the overall economy, to alleviate market dysfunctions and to reduce liquidity shortages. Building on diverse research conducted by international researchers and data provided by international economic institutions, this paper gives a comprehensive overview of different types of unconventional monetary policy tools that were, and still are, broadly employed. The concept of Quantitative Easing (QE) with its opportunities and risks will be elaborated, as well as appropriate exit strategies from these unconventional monetary policy measures. Putting a special focus on the QE programs run by the Bank of Japan, the Bank of England and the European Central Bank, the successes and failures of real-world examples of unconventional monetary policies will be analyzed in detail. In order to evaluate the usefulness of QE, a comparison of theoretical and real-world results will be conducted. The paper finds that even though QE had a broad range of positive effects on selected economic aspects, the risks of both over-indebtedness and a too strong dependence of economies on highly accommodative monetary policies prevail. Before considering an exit from QE – if still possible at all – many years of further monetary easing and economic stimulus will pass. The raison d’être of unconventional monetary policies, mainly QE, over an extent period of time is doubtful and will have to be closely monitored in the years to come.
In response to the global financial crisis, some of the major central banks in the world have implemented so-called unconventional monetary policy tools, in particular Quantitative Easing. These tools were aimed to improve conditions in financial markets, to provide liquidity and later on, in response to the European sovereign debt crisis, also to stimulate the economies. At the height of the European sovereign debt crisis Mario Draghi, president of the European Central Bank, said that “…the ECB is ready to do whatever it takes to preserve the euro” on 26 July 2012. How much will it take? What could be the negative side effects? And in particular, what are the implications for financial stability? These questions become increasingly important, as the balance between benefits and costs of such tools tends to worsen the longer QE is in place.
This paper wants to answer whether QE could have negative impacts on financial stability and if so, whether it could lead to another episode of financial instability, i.e. a financial crisis. First, it will explain what monetary policy is, which goals it has and what the conventional and unconventional monetary policy tools are, that central banks can use, e.g. QE. The next part will explain what financial stability is and which factors can lead to a financial crisis by using the most recent episode, the global recession.
This thesis will mainly focus on the negative impacts, the QE programme of the European Central Bank has on financial markets and the banking sector. Only in the analysis of the financial markets, it will make an exception and also include the programmes of the Bank of England, Bank of Japan and the Federal Reserve. The analysis of the financial markets will include results of other research papers, studies and journal articles as well as a self-conducted event study, by analyzing QE announcements and their impact on bond yields and stock indices. The analysis of the banking sector will focus on financial stability indicators, their response to QE announcements and their development in the time QE was implemented incorporating results found by other researchers. In the final part, all results found here will be brought together to answer whether or not QE negatively affects financial stability.