Question

Quantitative Easing may be far more risky as an antidote for the current crisis for emerging economies such as the Philippines, Indonesia, South Africa, Chile, Brazil, and Turkey than for the developed economies. State True/False/Uncertain and justify your answer as a short essay answer.

Answer 1

The statement is True.

Developed economies like Japan, USA and European Union have adopted Quantitative Easing policy because these economies have lower inflation or no inflationary situation since many years. There central banks were not able to push inflation higher with conventional monetary policies, resulting in them to pursue Unconvetional monetary policy tools. Quantittative Easing takes place when interest rate become zero and cannot fall beyond that(although some economies have negative rates). Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity and increase inflation expectations.

Whereas for developing economies like Philipines , indonesia, brazil and Turkey, there central banks may not have that much firepower  and it may be riskier for their central banks to pursue Quantitative easing and increase the money supply because they have higher inflation than developed economies, and increasing moeny supply will only worsen the economic problems. Their Central bank cannot pursue unconvetional tools as economies has not become mature like of developed economies in area of finanicial markets, Balance of Payment and reserve currency. US dollar, Japanese Yen and Euro are part of reserve currency due to there stability and acceptance in world markets. But these developing economies have persistent currenct account deficits, with subdued financial markets and lack of geopolitical stability in the region. Foreign investors invests in these economies for higher returns but are quick to move out of developing market economies if risk aversion takes place. therefore the central banks have to maintain the domestic supply of credit so that the economy may not overheat and result in excess inflation.