Quantitative Easing: a Subprime Antidote?

Abstract

To combat the devastating impact of the subprime crisis, the global authorities have used extreme and unconventional policy tools, one of which is quantitative easing (QE). But this policy move has also created much confusion and misunderstanding about its effects on the economy, inflation and financial markets. Some even question the effectiveness of QE to revive the ailing post-subprime economy because Japan used QE in the 1990s but failed to revive its post-bubble economy. Indeed, the Japanese experience holds valuable lessons for both the US and Chinese economies and financial markets in the coming years. Despite all the grim predictions for economic growth in the post-subprime world, both the US and Chinese economies and asset markets will not, in my view, fall into a Japanese-style quagmire.