The Global Financial Crisis-Induced Quantitative Easing: Transmission Mechanisms and Financial Market Impact

Quantitative easing (QE) is widely implemented by major central banks to stimulate the economic recovery following the 2008-09 subprime crisis.This paper critically examines the mechanism and financial impacts of QE through a comprehensive review of literature and empirical analysis.The financial impact of QE are primarily explained by three channels: the portfolio balance channel, the signaling channel, and the liquidity channel.Prior empirical studies yield several key findings.First, QE reduces bond yields, though the magnitude of its effect varies.Second, while most studies indicate a significant influence of QE on equity prices, findings on the direction of the impact, either positive or negative, remain mixed.Third, QE depreciates local currency by expanding the money supply.Finally, the initial round QE typically has a stronger impact than subsequent rounds, as diminishing signaling effects arise from market participants' expectations of prolonged low policy rates.