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This article discusses the reasons behind the success of QE, stating that, in theory, QE (buying long-term treasury bonds) shouldn’t have any effects, as it only shifts government debt from cash to treasury. However, this shift is what made QE1 successful; investors preferred the cash. In QE2 and QE3, when financial markets were mostly back to normal, what made the difference is the confidence the Fed injected back in the market. The public and markets felt comforted by the fact that the Fed would do whatever it takes to ameliorate the economy. This injection of economic confidence is a lesson the Bank of Japan and the ECB should learn in their own efforts to make QE successful.
This article was specifically chosen to show the effect of qualitative easing, which is essentially a bank’s use of forward-looking statements to reassure the market and provide stimulus. This is a prime example of the fact that sometimes, economics hinges on not only theory, but also on the psychological aspect of humans.