Quantitative easing, macroeconomic stability and economic policy effectiveness

Abstract

Purpose This study mathematically aims to evaluate the implications of a central bank’s adoption of a policy of quantitative easing (QE)/relative QE. Design/methodology/approach It is shown, within an investment-savings (IS)-liquidity preference-money supply (LM) framework, that this policy prerogative has, depending upon the aggressiveness which QE is undertaken, demonstrable implications for the conditions under which macroeconomic stability exists. Findings Furthermore, it is shown here that the presence of QE increases the effectiveness of traditional discretionary monetary and fiscal policies. Originality/value The study shows, within an IS-LM framework, that this policy prerogative has, depending upon the aggressiveness which QE is undertaken, demonstrable implications for the conditions under which macroeconomic stability exists.