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

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.Keywords: interest rate, quantitative easing, IS-LM framework, non-independence of supply and demand curves. JEL classifications: E40, E50

Examining the Liquidity and Productivity Relationship: Evidence from Post-reform China

“…Bleck and Liu (2014) showed a crowding-out effect in a situation of excess liquidity, as credit resource would be misallocated when central bank injected excessive liquidity into the economy. While Benmelech and Bergman (2012) discussed a credit trap equilibrium which argued for the ineffectiveness of an expansionary monetary policy in stimulating investment, Li (2013Li ( , 2014Li ( , 2017b and Li and Hazari (2015) pointed further to the theoretical potentiality of the "low interest rate trap" that led to speculation rather than investment.…”