Measuring the effects of Quantitative Easing.

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Department of Economics and Management

Master Science of Economics

Master Thesis

Measuring the effects of

Quantitative Easing

Relatori:

Prof. Alessio Moneta

Candidato:

Hikmat Valadli

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Abstract

This thesis investigates western countries’ economies after the 2007-2008 financial crisis and their central banks’ protecting policies. This financial crisis’ damages compared with great depression years and its detriments. The president of the Federal Reserve (Fed) decided to apply very brave and unanticipated monetary policies. These policies are called Unconventional monetary policies. Before the USA, Japan implemented a long year these policies, but after the financial crisis, Japan also enlarged volumes of their arrangements. Quantitative easing policies is one of the unconventional monetary policies and the main target with the help of asset purchasing, increasing liquidity level of the economy. After Quan-titative Easing policies balance sheets of central banks enlarged several times.

After the introduction chapter, in the first chapter, we focused on the USA economy and its economic troubles after the financial crisis. The mortgage crisis and its damages are clearly explained and investigated. With the help VAR model, we measured Quantitative Easing packages impacts in the economy. The second chapter is correlated with the Eu-ropean Union and its economy, financial crisis and after that sovereign debt crisis and its damages in European Union countries. Also, the VAR model and IRF graphs were applied to the European economy and its impacts. The third chapter is explaining Japan economy, and ‘’Lost 20 years” period. Compare with other central banks, Japan central bank applied earlier and more broadly. After applying the VAR model and IRF function, we can notice that Japan central bank was not successful enough in applying QE policies. The fourth chapter targeted to intro-duce United Kingdom economy and its three different periods. Bank of England continuing to use new additional asset purchasing packages for defending economy after Brexit period and its damages.

The thesis is also taking attention Forward Guidance policies and its impacts. Forward guidance policies are explained in the different countries case and measuring with suitable indicators. The main target of this thesis genuinely measures the effectiveness of quantitative easing policies with the help of the VAR model and impulse response function.

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1 Introduction

”Unconventional monetary policies” topic started intensively spoken about it by most powerful economic countries’ Central banks (USA, Japan, England, and ECB) after 2008-2009 crisis. Unconventional monetary policies, especially Quantitative easing, started to be the main adjustment tool for Central banks and affected just not these countries’ economies, at the same time, many other undeveloped countries. To measure impacts and to investigate dissimilarities in several countries’ practice will give us the effectiveness and final consequences of Quantitative easing.

2008 Global Financial Crisis is one of the main milestones of the developed countries’ Central bank’s changing monetary policy. Unconventional monetary policies are started intensively to introduce and implement by central banks. For the understanding meaning and working mechanism of the unconventional monetary policies, we can start investigating monetary policies which are us-ing before the 2008 crisis (conventional monetary policies) and their workus-ing mechanism.

Before the 2008 economic crisis, overnight rate was the main tool of central banks to adjustment for countries’ economies. The overnight funds’ rate is interest rate which is coming from the nightly deals of banks, and it is controlling by the borrowings and lending of banks among each other. Central banks using their monetary power and other tools for organising suitable overnight rate. We can describe this mechanism by concludes two main part:

• Signal MechanismCentral banks firstly decide policy rate. The policy rate is the target rate of the central bank, which they are trying to get. When the overnight rate comes near to policy rate, then the economy is going to change to their desired economic stance. The central bank with the help of different announcements, starting to present this policy rate and all other economic and financial institutions launches to adaption process to this rate.

• Liquidity management operationsare playing a technical and sup-portive role for this policy rate. The central bank is using bank reserves for implementing desired rates in the overnight banks’ actions. With the help of monopoly power on the assets, central banks can set quantity and the terms in which supplied at the margin.

The general working principle of the conventional monetary policies is using this mechanism for approach two opposite scenarios of which economy can be faced. Recession period central banks reduce banks’ funding costs to increase their liquidity and make a more dynamic economy. For this purpose, they are decreasing interest rates. However, if inflation is raising Central bank start doing an opposite process which is aiming to increase the interest rate.

Central banks faced the first scenario after this crisis. Main commercial banks and economic institutions needed liquidity to pass from the recession period to the recovery period. Through after 2008-2009 crisis, Central banks

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main target was to bring the economy to the recovery period and to revive the economy. For this purpose, they started to decrease the interest rate. For this purpose, they started to decrease the interest rate. However, even if they would decrease overnight rates near to zero lower bound, unfortunately, outcomes were not satisfactory for the reviving the economy again. Because of this reason, they started to follow ”unconventional monetary policies” in their monetary policies In the initial periods of this great recession, central banks such as FED tried to use conventional monetary policies for solving and pass this period. They started to decrease interest rate until the ”zero lower bound”. However, then central banks have faced with the uselessness of conventional monetary policies in the deep crisis times, unconventional monetary policies started to be the so-lution for them. From 2008, 4 main central banks of the world (FED, ECB, BOJ, and BOE) started to apply these monetary policies in their economies. In general, we can tell that just Great Britain and American central banks’ un-conventional monetary policies have got some similarities. Because of different type of legal constructions and different type economies, Central banks used a different kind of policies. These differences caused to appear distinct kind of outcomes about effectiveness issues. We can claim just that all central banks’ balance sheets are dramatically increased in this period. We can notice it in the graph Balance sheet of FED 2008-2015 period. There is a stunning increase trend.

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For explaining the theoretical framework of Unconventional Monetary Poli-cies, we must talk about the targets of these policies. When Central banks applied these policies to the economy, their main targets are followings:

• Decrease interest rates and shrink the gap between short-term and long-term interest rates.

• Lower borrowing costs for households and increase aggregate demand in the economy

• Raise output.

For reaching these targets, there is a different kind of UMP policy tools which must be used:

• Forward Guidance aims to give information for market players about the future of policy. When the Fed applied conventional policy before the 2008 crisis, FED’s announcements was giving enough information about the future. The main difference of Forward Guidance from that kind information is an explicit reference of future changes about the target interest rate. If we take attention FED’s announcements for the 2008-2015 period, we will notice that in the first periods 2008-2009 announcements were quite vague. Moreover, after 2011, it started to change, give more calendar-based information. Last periods, the Fed started creating some economic targets (for example unemployment under 6.5%), and until the economy reaches this target, they declare that they will continue this UMP programs. Forward guidance information can have got quantitative (EOB announcements about unemployment and their target of 7%) and qualitative criteria (BOJ announcements about price stability). Forward guidance transmission mechanism realisation process works like this: after announcements market players and people are started more informed and its effects their preferences and also interest rates and asset prices. • Negative Interest Rate )is commonly used by ECB and BOJ last years.

The central bank is the main financial institution in the country, and it is have got monopoly power among commercial banks. Commercial banks must hold some mandatory and non-mandatory money reserves in the Central Banks balances. The working mechanism of this UMP tool is to apply a negative interest rate to this commercial banks reserves and push them to increase the number of lending credits for household and firms. Banks will prefer to start lending money than paying negative interest rates. However, central banks can not apply this policy to the mandatory reserves of commercial banks. Banks can start to increase payment of credit fees, and in this way, they can decrease the effect of Negative interest rate policy effects. Because of that, it is vital to consider the capacity and degree of this policy. If impact degree is it not quite large, the effects can disappear. However, in general, this policy has got a positive effect on interest rates and asset prices.

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• Quantitative easing is the most common and used UMP tools.

It will be fascinating that to refer words of FED’s ex-president Bernanke like a starting point for discussion about Quantitative Easing. He told that about Quantitative Easing ”works in practice, but it does not work in theory.” He ex-plains his opinion, because of without financial market frictions and where that market player moving freely across the asset categories, purchasing programs have not got any effects in bond yields.

After the 2008 global financial crisis, there appeared big distrust in some risky financial securities. One of the main targets set for Quantitative easing programs, establish again confidence for these securities. Purchasing asset pro-grams increased liquidity and rebuild these financial markets again.

Among the tools of UMP, Quantitative easing is the most used one. The main objective of Quantitative easing policy to putting downward pressure on interest rates and increase banks’ liquidities for pushing them to give credits. We can accept that Quantitative easing programs are applied among different countries with varies policies. However, theoretically, QE programs have got two main targets for reaching these goals.

• Affect long term interest rates • Affect privet sector interest rates.

There are three main mechanisms, how QE programs reached these targets: • Imperfect substitutability for explaining imperfect substitutability we need to explain first perfects substitutability. Perfect substitutabil-ity is arbitrage which all assets have got same returns. Comparing with perfects substitutability, in the imperfect one, every asset has got its de-mand curve, and every supply adjustments affect this assets price and quantity. There is a different kind of market buyers, and they are sort-ing by their rapprochements about risk. Aversion buyers always prefer long-term bonds because they are more securitised than short-term ones. It comes from the imperfect substitutability of long-term and short-term bonds. Through with the help of this asset purchasing programs, central banks decreased the yields of long term bonds, and with this way, they are affecting interest rates.

• Signalling about future policy. QE programs can have got some signal effect for market players that the economic policy will be the same for a long period and interest will be near to zero-lower bound or less than that. At the same times, policies will be announced with the help of the forward guidance’s that what will be future targets of central banks.

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directly affects interest rates, especially long-term bonds yields. It is one of the main targets of Central Banks.

• Enlarged Financial Balance sheet. Central banks using their balance sheets for adjustments in the economy. Firstly they are enlarging their balance sheets for starting applying huge purchasing programs. These purchasing programs have got the same target, and they are focusing on special markets. For example, the Fed focused on the mortgage market. Fed used governmental companies, to buying mortgage-based securities and increase liquidity in this sector. The reasons for the Fed’s attention to the mortgage market was the 2008 crisis, and because of that crisis, the frozen mortgage system and it’ was decreased liquidity. After QE programs, banks started again giving mortgage credits, and it also started to affect interest rates. At the same time, the central bank started to buy long-term securities for increasing liquidities of banks and pushing and motivate them for lending their money for households and companies. It increased the speed of regeneration of the economy.

The practice of main central banks shows that implement Quantitative Eas-ing with Forward Guidance in the economy have got multiple positive effects. Because Forward Guidance’s announcement about the future of economy estab-lish some financial environment among the market players and after implement-ing quantitative easimplement-ing programs affects more economy. We can see usimplement-ing this practice in the real, and Fed did it 2008-2014 years.

If we analyse FEDs purchasing programs, we will notice that FED purchased long-term government bonds and mortgage-based securities. However, it does not mean that there is some constraint that Central bank can purchase only governmental bonds. If we take attention to Japan central banks to practice, we will see that Japan also buy some private bonds. Also, this practice used by European Central Bank in with three different phases between 2009-2015.

One of the main points of Quantitative Easing programs is a credibility is-sue. Before applying for QE programs, Central Banks must create timelines and macroeconomic targets. This credibility will be positive effects among peo-ple and will increase yields from these programs. Targets must be reasonable because central banks announce these targets, and if these targets are non-real, then Central banks must increase their balance sheets abnormally for reaching these targets or change them. The last version will be damaged the credibility of these programs and Central banks. It will be caused dramatically decrease the effectiveness and will bring ”financial chaos” among people.

Quantitative easing programs have also got foreign trade effects on the econ-omy. Increasing money supply in the economy push that country’s currencies to be less value compare with different countries’ currencies. This mechanism starts to make economy tradable and increasing to buy these countries’ prod-ucts. At the same time, because of QE programs bonds are changing their value lower and it invites foreign investors to the country.

There is much discussion about the effectiveness of QE programs. If we take attention of main macroeconomic targets which is reached by FED in 2008-2014

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years, we will notice that:

• The unemployment rate 7%

• Core Inflation rate had not exceeded 2%

• Gross domestic product growth was between 2 and 3 %

We must also accept that the 2008 financial crisis destroying effects are comparing with the 1930 Great Depression. These purchasing programs were the main tool among Unconventional monetary policies for passing this period. Purchasing programs pushing treasures’ yields to be lower. Since Treasuries are the basis for complete whole long-term interest rates, it also keeps furniture, auto, and other consumer debt rates affordable. It means that quantitative easing also has indirect assets price effects. The same mechanism also true for private bonds; it makes expending business cheaply. Previous results show that QE programs have got the direct and indirect impact and motives for reviving of the economy.

In the experience of QE programs, one of the main critiques were potential for expanding inflationary waves. Many critiques were voiced in this issue. If banks started lending more credits for the firm, they will increase production and hiring more workers. This mechanism will be to decrease the unemployment rate, but parallelly would fuel demand and increase the inflation rate. However, indicators of core domestic inflation rate show that it is not happening in the USA economy.

If we look at the different countries experiences of QE programs, we can easily notice that Central banks cannot always reach their target, which about to increasing lending credit. For example, 2009 was the most profitable year USA banks. Because when the Fed gave them money, banks sat on the funds instead of lending money. Banks used the funds to triple their stock prices through stock buybacks and dividends

QE program applied by FED and still applying by ECB, BOE, BOJ cur-rently. FED faced positive results after implementation of these policies. ECB was starting to use it currently to solve frozen banks systems and economic crisis of Greece, Spain, and other south European countries. BOJ was the first central banks which started to use in the economy. BOE decided that follow the same path with American central banks (FED). From this point, we can get the result that the main central banks are utilised QE program approximately the same period by different methods and different targets.

. Different countries use QE programs in various ways because of the forma-tion and problems of economies are several. QE programs are a combinaforma-tion of different purchasing programs in various periods. For the investigation effects

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This database will have separated for each purchasing program. With this way, we can analyse more accurately QE effects. At the end analyse we will general analyse countries experiences and their strategy in QE effects. Consequences of this comparison will show us how QE programs can be more effective.

For the analysing of the effects of QE programs firstly, we need to create databases. Our database will be organised in the monthly base because we need to investigate and focus on the effects of every QE programs. As we tell that each central bank applied QE policies to its economy differently. Their main target is the same pass recession period and to do a fast recovery period. However, for reaching this target, they decided different economic goals and took attention to different parts of the economy. We must give attention to this issue also when organising databases. In general, our database will be including seven economic indicators, but surely, we will add special indicators for each economy. There are two monetary and five macro indicators which organise by monthly schedule. These general indicators we are helping us at the end of the thesis for comparing economic strategies and their applying degree.

Macroeconomic indicators will show us the general situation of the economy and changes in policy years. These indicators dynamics will be explained to us the direction of the economy and how was effective QE policies in this direction. • GDPGross Domestic Product is the common quantitative measure of a nation’s aggregate economic activity. More specifically, GDP symbolises the monetary value of all services and goods produced within a nation’s geographic borders over an assigned time period. It is the main macro-economic indicator for visualisation of the economy.

• The unemployment rate is defined as the percentage of unemployed workers in the total labour force. Employers are considered unemployed if they currently do not work, even though they are able and willing to do so. The total labour force consists of all employed and unemployed people within an economy.

• inflation describes an overall rise in the Consumer Price Index (CPI), which is a weighted average of prices for various goods and services. The set of goods that make up the index depends on which are considered representative of a general consumption basket. Therefore, depending on the territory and the consumption behaviours of the majority of the population, the index will comprise various goods and services. Some goods might record a decrease in prices, whereas others may rise. Thus the overall amount of the CPI will depend on the weight of each of the goods concerning the whole basket.

• The interbank rate is the rate of interest charged on short-term loans made among banks. Banks lend and borrow money among each other in the interbank market in order to control liquidity and keep the reserve requirements placed on them by regulators; the rate depends on mar-ket conditions, credit ratings and maturity. The interbank rate can also

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mention to the price at which banks manage wholesale foreign exchange transactions in both the forward and spot market; spreads are more strict than for smaller retail transactions. Consumer Price Index (CPI) is a measure that examines a basket of consumer services and goods’ the weighted average of prices, such as transportation, medical care and food. It is counted up by taking price changes for each item in the prearranged basket of goods and averaging them.

• The 10-year Treasury note is a debt liability issued by the United States government with a maturity of 10 years on the initial issuance. A 10-year Treasury note pays interest at the fixed rate once every six months and pays the face value to the owner at maturity. The US government partially funds itself by issuing 10-year Treasury notes.

• A monetary base is the total amount of cash money that is either in total circulation in the hands of the public or the commercial bank deposits held in the central bank’s reserves

Special indicators will be chosen for every QE program applied by various central banks. We will choose these indicators for visualising Policy goals (in which sector applied QE policies) and their results (calculate effectiveness). Also, before the starting to apply for QE programs, Central Banks announced some economic targets. We will consider them in the consequence part.

If we look at the QE programs of countries separately, we will see that their purchasing programs include various kind of assets. For example, compare with FED, BOJ also purchased private sector bonds. We will include them and their amount also in our database.

Also, we must take attention that QE programs dramatically changed coun-tries debt/GDP percentage. Because of applying for QE programs, Central banks enlarged their balance sheet dramatically. We will analyse these changes and their potential dangers in our QE programs side effects part. Of course, comparing with critiques of QE policies, in the reality side effects of this policy was not dramatical, but it will be precious to analyse that also.

For the investigation of QE programs effectiveness, we will use some econo-metric techniques. We can easily notice that economic variables are mainly correlated with their lag values. For forecasting and analysing of relationships, we must consider in this issue. At the same time, we must accept that econo-metric variables are mainly intercorrelated among each other. With the help of these two characteristics of economic variables, we can make an econometric model for them.

A set of time series is called multiple time series. Our search project is based on this kind of data. We can analyse and estimate these data and their

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VAR models to investigate and model the dynamical behaviour of economic and financial time series. Var models are an extension of a univariate autoregressive model for dynamic multivariate time series. The construct of this model is such that past values partly explain the current values of a set of variables. Because of Var describes joint generation mechanism of the variables they are frequently using for economic analysis.

We can mainly introduce the working mechanism of Var :

We will use the VAR model for structural analyses. We can get information from this analyse casualty relations between policies and economic variables and the same time effect mechanism among economic variables. It will give us more clear observation for QE programs.

Recent year SVAR model is starting to use very frequently for analysing monetary transmission mechanisms and sources of business cycle fluctuation. SVAR models are using to delete some restrictions which we must to add for every single variable because of behavioural identifications. They are instru-mental when trying to identify the effects of every policy or economic agents.

If we compare the VAR model with an SVAR model, we will notice that in the SVAR model restrictions based advance. Relations between variables and other variable dynamics are considered as exogenous shocks. In VAR model focused on identification on coefficients. SVAR model focuses on errors of the system (exogenous shocks). For the empirical investigation of Quantitative Easing with VAR and SVAR model, we will use R software. ”vars” and ”svars” packages will be used for instructing model in R.

Next chapter we will analyse four traditional central banks, their QE pro-grams, their specific part and the effect of the economy. We must notice that

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during the thesis, we will not consider just only the 2007-2008 financial cri-sis. In the European Union case, we will take attention also to the Sovereign debt crisis. The chapter which is considered to Japan economy we will analyse ”Lost 20 years”. Brexit referendum and sovereign debt crisis are also the main milestones of the UK chapter.

The main target of this thesis measuring of effects ”Quantitative Easing” in different countries economies and investigate different outcomes caused because of different approaches of Central Banks.

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2 FED’s Quantitative Easing programs

2.1 Financial crisis causes and results

For starting to analyses the ”Quantitative Easing” program of FED, it will be beneficial to start describing its main reason, the 2008 global financial crisis. A huge part of the world’s economists is meeting in a common way that the 2008 financial crisis is the most dramatic economic disaster after the 1929 Great Depression. Even after the recession ended, still the unemployment rate was more than 9% in USA.

The financial crisis began in the mortgage market of the USA and developed to the world financial crisis. It stimulates dramatical decreases in GDP, and also the output of service and goods decreased by approximately six %.

There was a highly valuable increase in the housing market in the 2000s. The USA faced a short-lived recession period in 2001. The response of the FED to this crisis was decreasing FED’s rate 11 times (from 6.5% to 1.75%) between the gap 2000 May to 2001 December. Because of that, banks are faced huge liquidity and started to give mortgage credit, even low-income families who can-not pay this credit. The USA saw less interest rate (1%) of the last 45 years in 2003. Also, in 2004 October decision of Securities Exchange Commission took a hazardous step. They let relaxed the net capital requirements of 5 big investment banks. Goldman, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley. These banks were free leverage up their net initial invest-ment 30 times even sometimes 40 times. Because of these conditions bring with it a very positive environment for the mortgage market. Banks started to give subprime mortgages to low-income families. Banks created new financial instru-ment mortgage-backed securities and started to sell it. Huge investinstru-ment banks such as Lehman Brothers, Bear Stearns, Merrill Lynch stated to invest these ”subprime mortgage bubbles”. Result of this tendency was 70% homeowners rate in USA which is the biggest rates of USA history and first signals of crisis. Two reasons started to increase the velocity of the crisis. First June 30, 2004, FED started to increase rates until June 2006(5.25%), and it has remained unchanged until 2007 August. Secondly because high rates of households we can tell that the USA house market is stopped because no one wanted to buy a new home and it started to decrease home prices. (40% decrease in home construction rate.)

After decreasing the price of houses, the mortgage market was collapsed, and low-income families can not pay these credits and bankrupt. Mortgage market crisis directly affected subprime mortgage bubbles and main investment banks of USA were folded or survive with the help of the USA government. Between the gap, February and March of 2007, more than 25 subprime lenders filed for bankruptcy. In April one of the main financial institutions of USA ”New Century Financial ” was also in the list which is bankrupted.

This bankruptcy motived increasing pessimist stories and future forecasting in the financial market, and it brings with him big ”chaos”. After one English bank, Northern Rock is asked support from the Bank of England because of

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liquidity problem; this tsunami started to move out from United States bor-ders and became an ”international” disaster. Because many huge banks are invested in this kind of new financial instruments very intensively and after the collapse of this kind of securities, banks are faced liquidity problem. FED and other central banks try quick response for this crisis, but in this period Lehman Brothers filed for bankruptcy, Indymac bank collapsed, JP Morgan Chase ac-quired Bear Stearns, Merrill Lynch was sold to Bank of America, and Fannie Mae and Freddie Mac were put under the control of the US federal government. Without bank credits, the general market of the USA entered a huge crisis period, and it directly affects all of the worlds especially England, Eurozone and Japan market.

2.2 Quantitative easing programs’ targets and their

de-gree of success.

”Broadly, the Federal Reserve’s response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy.” These words are belonging to the president of FED after the 2008 crisis. Fed is started to apply some programs for passing this recession period. The first step was to decrease the Fed’s rate until the zero lower points, but it was insufficient. Because of that reason, FED started to apply unusual policies which are called Unconventional Monetary policies.

Fed announced its first Quantitative easing program. There were two main targets of this program. First was improving mortgage market conditions and support this market. For the reaching, this target 500 billion $ mortgage-backed securities were purchased by FED. The motion of this purchasing program was to increase the liquidity of the mortgage market and encourage the market player to give more mortgage credit. If mortgage credits are increased, then it will push mortgage rates to decrease and attract more people for this credit. First announcement’s plan also included purchasing debt securities which belong to government companies. For this purpose, the Fed purchased 100 billion $ debt of government companies.

The second important date was 18 March 2009. FED enlarged its purchasing budget also its targets which were trying to reach. In this date, Fed announced:

• 300 billion $ longer-term treasury securities • 750 billion $ mortgage backed securities • 100 billion $ debt of government companies

Moreover, the main target of this enlarging of programs was to help private credit market conditions. With this way, they tried rebuilding functionality of

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• Mortgage-backed securities held by the Federal Reserve.

• Federal agency debt securities held by the Federal Reserve. US Treasury securities held by the Federal Reserve.

• 30-Year Conventional Mortgage Rate • Monetary base.

All dates are the monthly base. 30-Year Conventional Mortgage Rate is the main mortgage rate which was preferred by the USA population last years, and it is a major indicator which can show us the situation of the mortgage market. Because low rates attract more clients for the mortgage market. The following graph will show us mortgage rate dynamics between the period 2008 -2016.

As we can see, after announcing the first QE program, there is a downward tendency on the mortgage rates, and it means lower rates attracting people for mortgage credits. With the help of the VAR model and Impulse response func-tion, we will analyse the impact of these purchasing program in this downward tendency. We added in this VAR model following indicators:

• 30-Year Conventional Mortgage Rate • Mortgage base

• Federal agency debt securities held by the Federal Reserve • Mortgage-backed securities held by the Federal Reserve • US Treasury securities held by the Federal Reserve

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Impulse response function will introduce use mortgage securities purchasing impacts to mortgage rates. If impacts are positive and significant, we can tell that first LSAPs reached its first target.

We can also observe that there are positive effects after announcing the first QE program. Impacts were positive and statistically significant. Also, second time enlarging on 18 March 2009 effects also observable because after this date the budget for purchasing mortgage securities was enlarged. Also, we add a monetary base in this VAR model because of liquidity and total money significant factor the number in purchasing of houses. There is no meaning of low rates without adequate money in the economy. However, we can tell that this positive effect was continuing other LSAPs. Because also third LSAPs FED purchased a huge amount of mortgage securities. There is observing positive effects but compare with first LSAPs it was shallow.

The second target of first LSAPs was improving conditions of the private credit market and increased liquidity in this sector. If we observe the graph which demonstrates private credit to non-financial sectors, we can observe that there was downward trending before QE programs. After QE programs and Forward Guidance policies of FED, there was started new upward trending.

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However, the mainly downward sloping continues until the middle of 2013. 18 March 2009 announcement and 300 billion$ dollars purchasing of long-term securities did not have got enough positive effects

We can observe that there were positive effects, but it was not big enough. Generally, we can get a consequence that first LSAP’s have reached its targets but not fully.

Second LSAPs program was announced on November 2010, and it contin-ues until June 2011. The main difference this program from other parts of Quantitative easing program was FED purchased just 600 billion $ longer-term securities. Fed purchased neither mortgage nor debt securities. The target was

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to decrease long-term security rates.

Fed also announced the Maturity Extension program on 21 September 2011. It was only sterilised program, and the Fed purchased 667 billion $ 6-30 years securities. Meaning of sterilised program is that FED not only doing purchase also selling securities. Fed sold 1-3 years securities at the same time. The main target of this program was ”To put -downward pressure on longer-term interest rates”. 20 June 2012 FED announced the extension of MEP program. Because of it was sterilised program FED continued selling securities and in the result after MEP balance sheet of FED was not changed.

From the beginning of the quantitative easing program, we can observe downward sloping in the longer-term interest rates. But it will be very valuable to look specially MEP applying period for measuring the effectiveness of the MEP program..

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From the graph, we can observe there quick and valuable effects were ob-served on interest rates but for more punctual analyse of the effectiveness of Maturity extension program, we will use again IRF.

Also, from the IRF graph, we can observe that there is a quick positive effect on the longer-term interest rates. As we can see, positive effects were observing the first 20 months after announcing QE program, and this positive effect is continuing second 20 months and decreasing and losing its significance in the next periods. For the general consequence for this target, we can tell that low long-term interest rates were reached by applying general QE programs to the economy, but MEP was not a special effect on this target. We can not get a

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consequence that MEP was fully successful.

The last step of the Quantitative Easing program was announced in Septem-ber 2012, and it continued until OctoSeptem-ber 2014. There was announced that FED would purchase 40 billion $ mortgage-backed securities and it continued 26 months. The second important milestone of the third Quantitative Easing program was December 2012. They started to purchase 45 billion $ treasury securities every month, and it continued 23 months. The speciality of this pro-gram was open-ended, and FED did not set a dollar limit for this propro-gram.

The overall output from the analysing FED’s QE program was that FED reached its program targets and got positive results from the QE program. The total program was indeed successful, but other parts were not so effective like first QE1 program. We can prove this output with the help of IRF functions.

2.3 LSAPs programs macro impacts

In this chapter, our main target analyses the main macroeconomic values and demonstrate QE program total influences on the macro values. The financial crisis had huge impacts on the economy, and it is not restricted just one sector or one country. 2008 crisis mainly affected all macro values negatively. One of the main targets of FED was normalising the macro situation. The main question was in which level FED reached its target?

For this purpose, we will create VAR models which are included main macro values and FED’s purchasing programs. Also, we will approach purchasing programs in sum, to measure the total effects of all purchasing programs without differencing its security type. We will focus on three main macro values which shows the situation of the economy more clearly:

• inflation.

• Industrial production. • Unemployment. • Consumer price index.

In the first chapter, we demonstrated Global and local damages of the crisis in the economy. One of our main target measures in which level Quantitative Easing programs solved this economic catastrophe.

From the first graph, we can observe an inflation rate changes between 2007-2016. The first striking event is a dramatical decrease in the inflation rate after the 2007-2008 financial crisis. The main explanation of this situation is decreasing liquidity in the country’s economic environment. Because banks stopped or decreased giving credits, low liquidity appeared and it impacted

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We will analyse inflation rates tendency and QE programs impacts on it with the help of the VAR model. For the starting point, we will summaries all purchasing securities and create total valuable. We will also add the monetary base in our VAR model and also inflation rates. All valuables are in the monthly base. Then we will create IRF function for measuring total purchasing impacts to the inflation rate.

From the first graph, we observe that after announcing QE programs in-flation rate was increased and turned back its normal level. We can get this result also in our IRF graph. First 20 month there was significant and positive effects, but then in the MEP period, it started negative effects. We can get

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the result that QE1 and QE2 were reached their targets but also because of controlling inflation rate MEP also was successful. Many critiques were affeered huge inflation rates, but FED could control it.

Second macro indicators are industrial production which shows us monthly real output economy. This indicator was faced dramatically decrease also be-cause of the 2007-2008 crisis. However, also, we can say that its tendency was also going to normal after some periods.

Moreover, Impulse response function shows us that there is a positive effect in Q1 and Q2 programs in the Industrial production and this program helped to increase the liquidity of the economy. Mainly improving liquidity situation of banks sector and stoping general chaos environment in this sector, caused giving new credit and opening new jobs and also companies can increase their works. Finally, it pushed to increase production. Especially passing psycholog-ical tension period and again solving uncertainty future problems, encouraged people to increase production again.

IRF also shows that the main target of Q1 was reached and it makes positive effects on the economy. The positive effects were going until all QE program period. In general, comparing of QE programs, we can define that QE1 and QE2 were more strong effects on the industrial production.

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Unemployment also was the main problem after the 2007-2008 crisis. We will analyse this macro-economic indicator with the help of Job Opening Rate. This rate defines new opening job opportunities in the monthly base. This indicator can help the unemployment situation in the economy.

Increasing liquidity and improving credit market condition pushed investors to open new job opportunities for the economy. This tendency affected our graph also, and we can observe a positive increasing tendency after 2008-2009 years.

IRF function shows us that first 20-month LSAPs have got huge positive effects in the Job opening rates. These positive effects are continuing next

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periods, but these effects decreasing tendency. These tendencies have got two main reasons:

• It was great to jump to turn back normal tendency from the 2008 crisis • QE1 program was more beneficial compared than others.

The last macro-economic variable of the economy is the consumer price in-dex. This indicator shows us the variation in prices for retail goods and other items. This indicator will demonstrate to us how the 2007-2008 crisis affected the budget of the population and how Quantitative Easing program affected them.

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We can say that the 2007-2008 crisis decreased consumer price index, but then upward sloping is continuing. The result of the IRF function is the following graph:

From the IRF graph, we can say that there was a great positive effect which is decreasing its’ impact timely. Like other macro indicators, consumer price index also affected from QE1 more.

For the consequence, we can tell that macro indicators are turned back after the economic crisis. QE1 was most effective LSAPs program which is applied by FED.

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2.4 Uncertinity of QE program

For increasing effectiveness of applying for Quantitative Easing program, it is necessary also to use Forward Guidance. FED used this policy also intensively in this period. It is economic evidence that for the applying economic policy, one of the most important thing the credibility to the policy. If there is a high level of uncertainty in the population attitude towards economic policy, even perfect organised and applied policy will not such expected outputs.

For the measuring of impacts Quantitative easing program, it will be precious also considered index, which is called ”Economic Policy Uncertainty Index for the United States”. This index will introduce us when the policy was applied, what was credibility degree in the population to this policy. As we can see in the first periods, FED announcements were not punctual, but after some periods FED announcements were changed.

As we can see that before the financial crisis its was very law uncertainty and it started to increase. Because of the difference between announcements of FED in the QE1 and QE4, there is a massive difference in the uncertainty indexes.

After QE program FED continuing these announcements and we can see that it is more stable like before economic crisis. So, we can get consequences that with the help of QE policy FED could solve ”chaos problem” which is appeared after the economic crisis. It is the beneficiary outcome, because of this chaos always being the main barrier for the economy to go recovery period again.

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2.5 Economic situation after QE program

.

After finishing the Quantitative easing program, there are passed five years, and we can observe outputs of the QE program to the economy more clearly. It was one of the most prominent economic policy of the FED’s history. It is also evident that Quantitative Easing was revaluation on the FED’s policy history. We can compare it only with 1979-1980 FED’s anti-inflation policy. However, of course, it was a smaller balance sheet and smaller impacts than QE program. After the Quantitative easing program, FED balance was expensed from 900 billion $ to 4.5 trillion $. We can tell that this policy is mainly decreased damages of economic crisis. FED had reached its macro and program targets mainly.

If we look at the graph which shows us the Job Opening Rates, we can say that the American economy is continuing upward slopping after QE program. Because of 2007-2008 crisis rates were decreased very dramatically and QE pro-gram solved this problem effetely. We can tell that FED reached its target in this issue.

We can also recognise positive feedbacks from the GDP graph. As we can see that there was a diminished tendency in the economy. After announcing QE programs, GDP began to increase again, and the results were satisfying.

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However, there also many points that must be considered. First, we observe that compare with other parts of program QE1 was more effective. If we consider the budgets of programs, we can notice that other QE programs’ budgets were more than QE1. Last LSAPs had not got any dollar limit. This was a positive signal for people and companies. However, QE3 was not useful like QE1.

QE program supplied the economy with liquidity and got positive outputs. However, after some period’s economy started to depend on this program.

Some developing countries are affected very negatively from this program. Because of their currencies are started lost value compared with a dollar. It negatively influenced their economy and import-export system. They still facing these problems. Especially Argentina, Brasil, Turkey.

For the ultimate consequence, we can tell that the QE policy of the Fed was successful. However, if we analyse it more attentively, we can also tell that there were also many adverse effects.

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3 ECB’S Quantitative Easing programs

3.1 2008 crisis’ damages and ECB’s approaches.

Compare with the USA, Europe faced more dramatic brunts of the 2008 financial crisis. Today some European Union countries’ economies still cannot reach their before crisis situation and demonstrations. Southern border countries of EU still have got enormous problems with their government debts. The 2007-2008 financial crisis shows itself previously with the banking crisis; then it is dramatically changed to the sovereign debt crisis. Euro even have faced dangerous of disintegration. But ECB with its announcements and monetary policies could fend off these perils. We can easily tell that the words of European Central Bank president, Mario Draghi had got vital value.

After the collapse of Lehman Brothers investment bank, the 2007-2008 fi-nancial crisis started to be a global crisis. This global crisis sharply affected the Euro system and its circulation mechanism. Real GDP contracted by 6% in the Euro area. First periods of crisis, there were considerable problems in inter-bank trades of the European ecosystem. ECB addressed to increased credit and counterparty risk for solving this problem. Started to apply huge and unconven-tional monetary policies. ECB main strategy was in these to take intermediate role between interbank trades and with the help of huge LSAP’s (Large Scale Asset Purchase Programs) during the 2008-2009 period to solve banks liquidity problems. However, a huge wave of the 2007-2008 financial crisis was in the future.

After the banking crisis, the EU faced a sovereign debt crisis which some southern European countries found themselves in a swamp of debt. Before cre-ating EU zone countries were agreed monetary, debt and financial criteria. EU countries signed the Maastricht treaty and accepted its criteria on 7 February 1992. One of the essential criteria of this treat was set a limit deficit spend-ing and debt levels. However, several EU countries did not follow this rule and started securitizing their future government revenues. In some ways, they can mask their real levels of debt from the public. After they faced banking collapses, they are tired to save banks. It also boosted its government debts dramatically.

We can undoubtedly tell that 5 November 2009 is a significant milestone in the financial crisis in Europe. Because of Greece prime minister, Papandreou’s speech was the starting point of the Sovereign Debt Crisis. From his speech pub-lic learned that Greece fiscal deficit is 12.7% of GDP rather than 3.7% reported by the previous government. This started confidence shock all of Eurozone. After Greece, Italy and Portugal announced a high level of public debts and Ireland and Spain high level of private debts. Greece accepted the EU-IMF package for saving the economy. After one-week Greece accepted helping pack-age ECB announced its saving the program for EU. Security market program was announced 10 May 2010. One of the main specialities of this package did not make any confusion about the violation of article 123. (Article 123 – ECB legal framework normally forbids the purchasing of sovereign bonds.) Because

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before there were important barriers to apply monetary policies by ECB because of article 123. However, all purchasing happens in the secondary markets, and it is not violation article 123 in any way. After the banking crisis, the EU faced a sovereign debt crisis which is some European countries faced big deficits in their balance sheets. At the time of the establishment of the European Union, the founding members agreed on common monetary, debt, and financial criteria for the operation and supervision of the system. EU countries signed the Maas-tricht treaty and accepted its criteria on 7 February 1992. One of the essential criteria of this treat was to set a limit deficit spending and debt levels. How-ever, several EU countries did not follow this rule and started securitizing their future government revenues. In some ways, they can mask their real levels of debt from the public. After they faced banking collapses, they are tired to save banks. It also boosted its government debts dramatically.

However, Security Market Program was not such effective in solving the sovereign debt crisis. In the during 2010-2011 years Ireland and Portugal also accepted EU-IMF helping packages. Mario Draghi’s famous speech changed the situation and saved the future of the EU zone. It was ‘’Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro and believe me it will be enough”. After this speech’s impacts on society and monetary policies were enough to save the EURO. ECB announced a new monetary policy which is called Outright Monetary Transaction. It was included to purchase government bonds in the secondary market for the countries which accepted activation and monitoring. The main target was to earn the reversibility of the investors for the Euro. One of the interesting facts of the OMT program from the first day of this program until nowadays, ECB did not purchase anything under this program. Because of even one country did not have made a formal request.

ECB could preserve the EURO zone and the future of the Euro. However, anaemic growth and low inflation were continuing in the economies of Europe. From 2013 until to the December of 2018 ECB started to apply Unconventional Monetary policies more intensively and enlarged budgets. ECB applied a com-bination of Forward Guidance, Quantitative Easing, Negative interest rates and Credit easing to the economy. Compare the FED quantitative easing packages ECB divided it QE packages into four types:

• Corporate sector purchase program (CSPP) • Public sector purchase program (PSPP)

• Asset-backed securities purchase programme (ABSPP) • Third covered bond purchase programme (CBPP3)

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pe-• Covered bond purchase program • Covered bond purchase program 2

We will analyze these programs and their effects on the European economy.

3.2 Sovereign debt crisis. SMT and OMT programs

The major collapse of the 2007-2008 economic crisis to the Eurozone was a Sovereign debt crisis. Even some European countries started to think about to leave the Eurozone. The sovereign debt crisis was a situation which south European countries (Greece, Italy, Spain, Portugal and Ireland) inabilities to repay or refinance their government debt. It started after the famous speech of previous Greek prime minister Papandreou that real deficit 12.7 % of the GDP rather than 3.7% reported by the previous government. It was a huge coefficient of a shock for all of Europe. It started instantaneously considerable problems for Europe. Spain and Ireland private debts and Italy and Portugal public debts started more hazardous for the future of Europe. There were assorted reasons for this crisis:

• In several countries arising from property bubbles • In several countries saving the banking system

• Government responses to slowing economies post-bubble

The structure of Eurozone also was a problem for solving this problem and quick responses to this crisis. European countries which were fighting with the Sovereign debt crisis started to get help from ECB and IMF. 3 May 2010 Greece accept the ECB-IMF program.

10 May 2010 ECB announced its Security Market program. It was the largest LSAPs program compare with previous ones which were applied in the Eurozone. ECB purchased a total of 218 billion Euro Italian, Spanish, Greek, and Portuguese bonds and take them until the end of 2012 (finishing maturity period).

Security Market Program was included in the following issues: • Purchase Portugal, Ireland, Greece government debt • Malfunctioning of the security market

• Restore the monetary policy mechanism • Later it will purchase Italian and Spanish

Governing Council decision on 6 September 2012 to initiate outright mone-tary transactions, the Security Market Program was terminated.

Security Market program was insufficient. After Greece, Ireland and Por-tugal also asked IMF-EU packages. Security market program affected the debt problems of these countries, but it was insufficient and could not solve it.

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We can observe this fact also the following graphs. Following graph show us the dynamics of debt percentage of the GDP.

26 July 2012 ECB president Mario Draghi: “Within our mandate, The ECB is ready to do whatever it takes to preserve the euro and believe me it will be enough”. It was turning the point of Sovereign debt crisis. ECB announced its new Outright Monetary Transaction on 2 August 2012. This program target was the purchase of government bonds in secondary markets for member countries which are requested and accepted monitoring.

Draghi’s speech and OMT program reverse sovereign-debt market self-destructing spiral. It is fascinating facts that under this program, ECB did not purchase anything because none of the EU members asked formal request.

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3.3 First applied Quantitative Easing program of the ECB.

After the 2007-2008 crisis come up in the USA economy, after a short time, it accepted as a global crisis. Previous distorters of this crisis to Europe was the banking sector crisis. ECB decreased its benchmark rate from 4.25% to 1%. However, unfortunately, it was not enough. The banking sector has got vital importance in the Euro area. Because it is the main instrument of the Euro-pean monetary transmission mechanism. For example, Europe companies’ 70% financial support is coming from the banking sector. Compare with Europe, USA companies 80% financial supports getting from market-based sources. In-tervene in this problem and solve this quickly was a tough challenge for ECB. Quick response and solving problems were a tough challenge for ECB because of the structural and legal framework of Europe.

ECB announced its first Covered Bond Purchased Programme (CBPP). This program was announced 2 July 2009 and finished 30 June 2010. The program included purchase 60 Billion Euro bond which belongs to European Union coun-tries in the secondary market. The ECB intends to hold the assets bought under this programme until maturity. Compare with its similar purchasing programs, Europe and other parts of the world; it was quite a small program. The main targets were:

• Improve market liquidity

• Ease funding conditions for banks and enterprises

For the analyzing effectiveness of this small LSAP’s program, we will focus on one Interbank rate. If this rate is quite low, then banks will start to increase interbank trades. The following graph will demonstrate us dynamics of the interbank rates in Europe.

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As we can see after the 2007-2008 crisis, ECB pushed sharply decrease in this rate. We will also create a VAR model, which is included Interbank rates, ECB assets and M3 in Europe. VAR model calculated in 6 lag and asset purchases were added external shock. With this way, we can analyze in which level this program affected interbank rates.

IRF analyses show us that before applying Covered Bond Purchased Pro-gramme interbank rates started to go down. Impulse response function will demonstrate us correlation of between in “impulse ” role CBPP and “response” role interbank rates. It is because of ECB quick response to the financial crisis, and this program had positive effects.

The following graph will demonstrate us credit institutions yearly liabilities with euro. It will help us to evaluate the Covered Bond Purchased Programme more generally. Red lines will show us starting and finishing times of the LSAP program.

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As we can see after the finishing of the ECB purchasing program, there is observing downward slopping, but it was temporary. Upward sloping was continued until the middle of 2013.

3.4 Purchase programs and their targets

According to many economists, Draghi’s speech and OMT programs combina-tion saved the future of the Eurozone and could save Europe from the recession period. But anaemic growth rate and inflation low stuck below target were still a problem for Europe. For the normalizing the European economic situation, ECB started applying a great combination of ”unconventional monetary poli-cies” to the economy. It was also a period which ECB applied for massive asset purchase programs. Compare the previous asset purchase programs, and these LSAPs (Large Scale Asset Purchase program) had got larger balance sheets.

ECB’s applied unconventional monetary policies were quite more large sec-tors of the economy and focused on more prolonged periods. Combination of unconventional monetary policies which is applied by ECB was included:

• Asset purchase programs • Forward Guidance • Negative interest rates • Credit easing measures

4 July 2014 was the first time for ECB history to using Forward Guidance. It was claimed that ECB interest rates to remain at present or lower levels for an extended period. Negative interest rates and credit easing measures were a

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combination for improving conditions of the European credit market. In this period ECB under its negative interest rate policy decreased its interest rates firstly to -0.1% on 5 June 2014 then to -0.4% in March 2016.

ECB announced its LSAPs programs on 4 September 2014 with Draghi’s speech “will have a sizeable impact on our balance sheet”. It was forward guidance for Europe that these programs would continue until growth rate and other macroeconomic variables would normalize. Asset purchase programs of the ECB have included four different programs, and they have implied four different sectors:

• Corporate sector purchase program (CSPP) • Public sector purchase program (PSPP)

• Asset-backed securities purchase program (ABSPP) covered bond pur-chase program (CBPP3)

3.4.1 Corporate sector purchase program

Between 8 June 2016 and 19 December 2018 ECB purchase corporate sector bonds under the CSPP program. ECB and 6 NCBs (National Central Bank) applied for these purchase programs together. They were France, Italy, Ger-many, Belgium, Finland, and Spanish central banks and each of them was re-sponsible for some Euro area, and ECB coordinated them. ECB applied for this program in the first and secondary market, and criteria were that it must non-bank bonds and in the Euro area. After January 2018 ECB stopped real purchases but reinvested principal payments from maturing securities.

ECB introduced the target of CSPP in the press release:” The CSPP aims to further strengthen the pass-through of the Euro system’s asset purchases to the financing conditions of the real economy.”

For the analysing of the effectiveness of the CSPP, we will create a VAR model which will include main macroeconomic variables such as unemployment rate, M3, Business surveys. Especially Business tendency surveys for Man-ufacturing variables will show us the real effects of the CSPP program to the business environment. This variable shows managers expectations about current and near-future of their business. CSPP was addressing to non-bank corpora-tions’ bonds, what because this variable can be the main measure tool of the effectiveness of CSPP.

From the following graph, we observe the changing dynamics of the variable was in upward sloping, and its tendency continued until 2018 and started again downward sloping.

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As we know, December of 2018 was the deadline of asset purchase programs of the ECB. After this date, ECB announced that they would stop purchasing securities but continuing reinvesting bonds which arrived maturity date. From the IRF function, we can observe that the CSPP program has got a positive effect on it. From the following graphs, we can easily detect that the CSPP program had got very positive and huge effects on the private sector of Europe and their expectation of the near future. The positive effects were statistically significant. One of the important outcome getting from the IRF function is that positive effects are always increasing tendency and the size of positive effect are also increasing tendency.

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For the consequences, we can get the result that CSPP programs were quite successful in their target and created a more positive expectation for the future by the business environment of Europe.

3.4.2 Public sector purchase program (PSPP)

Public sector purchase program firstly announced 9 March 2015 and continued until 19 December 2018. It is also was the largest purchase program in the ECB’s history. Like a CSPP also PSPP continued still December 2018 and from 2019 January reinvested maturity bonds which are purchased before. One of the main targets of the ECB when applying this program to save market neutrality in order to avoid interfering with the market price formation mechanism. Following graph will show us ECB’s PSPP program monthly change in this period. As we can see after the end of 2018 ECB started to decrease purchasing’s of the securities.

Under PSPP program ECB purchased two different kind of bonds. • Central Government bonds

• Bonds issued by recognized agencies, regional and local governments, in-ternational organizations and multilateral development banks located in the euro area

ECB’s main targets under Public Securities Purchase program were: • support market liquidity

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• Central government liabilities denominated in Euro • Banknotes in circulation

• Base money

• Euro area credit institutions’ current account

The following graphs will demonstrate to us, changes in this variable during the crisis and after the crisis recession period. As we can see, all following variables are upward slopping.

We will create a VAR model with the help of these variables and monthly purchasing, which are doing under PSPP program by supervision ECB and NCBs. Moreover, also, we will add liquidity variables in our VAR model. From the following IRF graphs, we can observe that there were positive effects on the liquidity and these positive effects were statistically significant.

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3.4.3 Asset backed securities program

The third group of the Euro system asset purchase program was Asset-backed securities purchase program. This program was applied during the 21 Novem-ber 2014 and 19 DecemNovem-ber 2018. The main target of ABSPP program was improving conditions of supplying credit by European credit institutions and eases borrowing conditions for households and firms.

For the analyzing effects of this program, we will see two main variables which will show us the credit conditions, which are lending by Euro area banks. The first variable shows us the interest rate of the credit, which is lending non-financial corporates and second one demonstrates interest rates which are lending to households by banks. Surely if the interest rate will quite low then supplying credits will increase.

The following graphs will show us monthly changes of both interest rates in the Euro area zone.

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As we can both, there was downward slopping after 2014 when ABSPP started to apply. Compare with household credit rates, non-financial corpora-tion credit rates were observing more sharply decrease. For the deeply ana-lyze, we will use rates and monthly industrial production index and monthly purchases under this program. The following IRF functions will show us this program the measurable effects of this asset purchase program.

As we can see that ABSPP had got real negative effects on the interest rates. This effect improved condition of credits for the non-financial corporations. The real target of the adding Industrial production index to the VAR system was that even without changing credit conditions because of economic condition

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improved credit supplies can be increased.

As we can see from the previous graph that this program also had quite sufficient effects on household credit rates.

3.4.4 Covered Bank Purchased Program 3

Last asset purchasing program of the ECB was Covered Bank Purchased Pro-gram 3. The duration of this proPro-gram started 20 October 2014 and continued until 19 December 2018. Under this program, ECB purchased covered bonds of the Euro system.

Covered bonds are debt securities issued by banks and mortgage institutions. From the announcement of the Bundesbank, we can understand that the main target of the CBPP3 was to improve credit market and supply economy with credits for the enhance transmission of monetary policy. The following picture will show us the changes in the CBPP3 monthly:

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For the analyzing of the CSPP3 program, we will focus on the credit supply of Europe. The following graph will demonstrate us changes in credit market during the CBPP3 was applied. The data in the quarterly dimension and shows credit supplied by European banks to non-financial corporations.

From this chapter, we saw the different types of asset purchase programs of the ECB and their targets. With the help VAR model and IRF function, we measure their reaching levels. Generally, we can tell that they are reached desired target levels, but we can tell that all of them was sufficiently effective.

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3.5 Macro targets

ECB’s reflex to the 2007-2008 crisis was quite quick but not sufficient. From the first periods of the financial crisis, ECB started to apply for asset purchase programs. However, much more huge ones were especially after 2013.

By 2013, ECB could emerge from recession and huge risk of the distribution of the European Union and the future of Euro. These programs addressing to the normalizing European Union countries’ economies and specially normalize growth rate and inflation rate. However, still, some European economies and their macroeconomic variables did not change their normal degrees before the financial crisis. Because of that, ECB started huge asset purchase program. These programs were addressed in the four different sectors of the Euro system. But the main targets were normalized Ecosystem like before the financial crisis. For analyzing the main macro indicators of the Euro system, we will create a VAR model and will measure the total asset purchase programs effects to them. Our VAR model will include inflation, industrial production, M3, unemployment rates.

Primarily we will start analyzing inflation rate. The target rate for the Euro system is 2%, and after applying first unconventional monetary policies, we can observe that harmonized inflation rate was much more below than this target rate. One of the main reasons for announcing more extensive asset purchase programs were normalizing inflation rate. The following graph will demonstrate our changes in the inflation rate during the 2005-2018 period.

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programme, the inflation rate approaches its target levels.

For creating a VAR model, we will use not all of the periods, just asset purchasing programs applying periods. Also, for analyzing IRF function, we will summarise all assets programs and measure the total effects on inflation rates. IRF function shows us that asset purchase programs had not only positive or negative effects on the inflation rates. However, all effects were statistically significant, but they were not only one direction. We can detect that this impact was a stabilizing role for the inflation rate.

For the conclusion, we can get consequences that the Asset Purchase Pro-gram could stabilize harmonized inflation rate of the Euro system

The banking crisis and after this following Sovereign debt crisis deeply has influence European countries and their economic systems. Especially Greece, Portuguese, Ireland, Spain, and Italy faced colossal economic and unemployment damages. The unemployment rate is one of the main variables that display the economic situation of the country.

Following graph show us, in which level crisis affected the unemployment rate in Europe. We can detect that the unemployment rate was in decreasing slop until the financial crisis, and then the crisis affected the economy deeply. Because of the banking crisis, banks decreased, supplying the business credits for the business environment. These credit lending conditions do not let for business society to make new job places and at the same time, the private sector started cutback their staff.

After Asset Purchase Programs and other unconventional monetary policies improved credit conditions, and it paved the way for new business opportunities. We can examine this upward slopping also from the graph.

Measuring the effects of Quantitative Easing.

Department of Economics and Management

Master Science of Economics

Master Thesis

Measuring the effects of

Quantitative Easing

Relatori:

Prof. Alessio Moneta

Candidato:

Hikmat Valadli

Contents

1

Introduction

2

FED’s Quantitative Easing programs

2.1

Financial crisis causes and results

2.2

Quantitative easing programs’ targets and their

de-gree of success.

2.3

LSAPs programs macro impacts

2.4

Uncertinity of QE program

2.5

Economic situation after QE program

3

ECB’S Quantitative Easing programs

3.1

2008 crisis’ damages and ECB’s approaches.

3.2

Sovereign debt crisis. SMT and OMT programs

3.3

First applied Quantitative Easing program of the ECB.

3.4

Purchase programs and their targets

3.5

Macro targets