Sana Hussain, a PhD student at Queen Mary University of London, has written a contribution for the CGR blog about her current research.

The 2008 global financial crisis resulted in an economic meltdown of unprecedented strength and length, adversely affecting economies worldwide. Dramatic declines in GDP coupled with rising unemployment and falling consumer confidence sought immediate attention to prevent the resulting recession from turning into a more serious and prolonged slump. Interest rates were cut and fiscal stimulus packages announced in an attempt to boost growth and jobs. When interest rates could no longer go down further, the UK introduced quantitative easing for the first time in the country in 2009.

Till date the Bank of England has committed a total of £375 billion to quantitative easing whereas the US Federal Reserve is currently purchasing $85 billion of securities per month on top of the $2.3 trillion expansion of its balance sheet since 2008. The graph below shows how the total assets of the central banks in the developed economies of Australia, Canada, Denmark, the euro area, Japan, New Zealand, Norway, Sweden, Switzerland, UK and US have evolved since 2006. The sharp hike is the impact of quantitative easing and followed by a persistent increasing trend as the policy continues. Recently, the Fed has announced the prospect of tapering its asset purchases, planning to reduce its bond-buying program this year and end it completely in 2014. The market reaction to the announcement was strong resulting in a sharp sell-off in currencies, stocks and bonds. This subsequent investor sentiment led the Fed to restate its objectives namely that bond-purchases will not halt until the economy strengthens. This essentially means that unless economic indicators like output, employment and consumption improve, there will be no reduction in the purchase of bonds. Therefore, it seems that the Fed’s tapering plan may not materialize as initially envisaged.