RISK

How is a quantitative easing affecting perception of risk today?

How is a quantitative easing affecting perception of risk today?

Introduction

This paper intends to explore the concept of risk. Further, this paper mainly focuses on the changing perception of risk due to ease of quantitative figures. The concept of risk has gained a lot of concern in past years due to global financial crisis. The global credit crisis shall also be discussed in order to understand the element of risk.

Discussion

Quantitative Easing

When a country is facing a situation where it may slip in to recession then the government comes in to action and consequently it may use the strategy of Quantitative Easing (Smith, 2010).

Central Banks may use quantitative easing as a monetary policy to fuel the local economy, where traditional monetary policies in connection with a number of factors are ineffective or insufficiently effective. With quantitative easing the central bank buys or takes in ensuring the financial position by increasing the money supply, whereas in the traditional monetary policy of the Central Bank buys or sells financial assets to maintain and stabilize market interest rates at a certain target level.

According to the IMF's policy of quantitative easing, since the financial crisis started in 2008, the central banks of well developed countries led to the central banks of developed countries since the beginning of the financial crisis in 2008 led to a decline of systemic risks since the Lehman Brothers got bankrupted. The IMF believes that this policy has also led to an increase in market confidence and reduces the risk of a recession in G7 countries.

Perception of Risk Quantitative easing can easily lead to elevated inflation than anticipated, if the magnitude of the required mitigation will be revalued, and will be issued too much money. On the other hand, the policy may fail, if the banks will be hesitant in lending to households and small businesses to stimulate demand. Quantitative easing can efficiently mitigate the process of reducing the debt capital and, thus, reduce the yield on debt. However, in the case of the globalized economy low interest rates could lead to the stock bubble in other countries (Smith, 2010). The boost in money supply creates an inflationary effect, which manifests itself with a certain lag time. Inflation risks could be mitigated if economic growth exceeds the growth in money supply associated with mitigation. If production in the economy will grow due to boost in money supply, output per unit of money can grow, even if the economy will have more money. For example, if stimulated by the growth of GDP, it will grow with the same rate as the magnitude of monetized debt and inflationary pressures will be neutralized. This may occur if the banks will make loans, not to accumulate in their cash. New money can be used by banks for investment in developing, trade and commodity markets, not in the form of loans to local businesses who are experiencing financial ...