Quantitative easing

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Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity.[1] Quantitative easing is a novel form of monetary policy that came into wide application after the 2007–2008 financial crisis.[2][3] It is used to mitigate an economic recession when inflation is very low or negative, making standard monetary policy ineffective. Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.

Similar to conventional open-market operations used to implement monetary policy, a central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. However, in contrast to normal policy, quantitative easing usually involves the purchase of riskier or longer-term assets (rather than short-term government bonds) of predetermined amounts at a large scale, over a pre-committed period of time.[4][5]

Central banks usually resort to quantitative easing when interest rates approach zero. Very low interest rates induce a liquidity trap, a situation where people prefer to hold cash or very liquid assets, given the low returns on other financial assets. This makes it difficult for interest rates to go below zero; monetary authorities may then use quantitative easing to stimulate the economy rather than trying to lower the interest rate.

Quantitative easing can help bring the economy out of recession[6] and help ensure that inflation does not fall below the central bank's inflation target.[7] However QE programmes are also criticized for their side-effects and risks, which include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term), or not being effective enough if banks remain reluctant to lend and potential borrowers are unwilling to borrow. Quantitative easing has also been criticized for raising financial asset prices, contributing to inequality.[8] Quantitative easing was undertaken by some major central banks worldwide following the 2007–2008 financial crisis, and again in response to the COVID-19 pandemic.[9]

  1. ^ "Quantitative Easing". Bank of England.
  2. ^ Michael Joyce, David Miles, Andrew Scott & Dimitri Vayanos, Quantitative Easing and Unconventional Monetary Policy – An Introduction, The Economic Journal, Vol. 122, No. 564 (November 2012), pp. F271-F288: "The most high-profile form of unconventional monetary policy has been Quantitative Easing (QE)."
  3. ^ Oatley, Thomas (2019). International Political Economy: Sixth Edition. Routledge. pp. 369–370. ISBN 978-1-351-03464-7.
  4. ^ McTeer, Bob (23 December 2010). "There's nothing wrong with the Fed printing money". Forbes.
  5. ^ McTeer, Bob (26 August 2010). "Quantitative easing is a toxic phrase for a routine policy". Forbes.
  6. ^ Joseph E. Gagnon, Quantitative Easing: An Underappreciated Success, Peterson Institute for International Economics, Policy Brief 16-4 (April 2016).
  7. ^ Ricardo Reis, "Funding Quantitative Easing to Target Inflation", in "Designing Resilient Monetary Policy Frameworks for the Future”, Proceedings of the Jackson Hole Economic Policy Symposium: Federal Reserve Bank of Kansas City, August 2016, pp. 423–478.
  8. ^ "A numbers game: How quantitative easing lifts stock prices". Banking Observer.
  9. ^ McKenna, Barrie (27 April 2014). "An uneasy relationship behind response to financial crash". The Globe and Mail.