Implications of Quantitative Easing Policy Flow of Funds Analysis of the UK Economy Post 2007

This paper employs a flow of funds (FOFs) analysis based on Godley and Lavoie (2007) balance sheet framework using ONS sectoral data for the period between 2007 and 2011. It focuses on two distinct sub-periods (2007-2008 and 2009-2011) to assess the initial effects of mid-2007 financial crisis on UK economy and examine the influence of the Bank of England's (BoE) asset purchase program (APP) on the sectoral financial positions of the main seven sectors in the main financial asset categories. The analysis implicates five main results. The impact of APP found its way into various asset markets where higher asset prices and lower asset returns can be noticed especially for longer-term assets. This fall in asset yields decreased the cost of both debt and equity capital and hence induced different sectors to raise further longer-term funds from these two sources. However, the fall in the cost of capital might cause a trade-off between bank loans and longer-term capital as most sectors used big shares of the funds raised to repay significant amounts of bank loans which dramatically dropped after APP was introduced. The relatively lower asset yields in the UK motivated some sectors to move substantial amounts of domestically raised funds outside the country to benefit from higher returns overseas