Quantitative Easing

Quantitative Easing (QE) is a non-traditional monetary policy that is operated by a country's monetary management agency (usually the central bank) through open market operations to increase the money supply in the real economic environment. The difference between quantitative easing and traditional open market operations is that the amount of assets purchased and the risk are higher (relative to short-term Treasury bills).

The Purpose and Means of Quantitative Easing

The purpose of quantitative easing is to further stimulate economic activity and increase inflation expectations when interest rates have already dropped to close to zero or below zero. By increasing the money supply, quantitative easing can lower long-term interest rates, increase asset prices, improve market confidence, and promote credit and investment.

The method of quantitative easing is that the central bank uses money created out of thin air to purchase national bonds, mortgage bonds and other securities in the open market, which increases the funds in the settlement accounts of commercial banks opened by the central bank and injects new liquidity into the external banking system ( into monetary assets of external banks).

Cases and effects of quantitative easing

Since the outbreak of the financial crisis in the late 2000s, central banks in major developed countries, such as the United States, the United Kingdom, Japan and the Eurozone, have adopted quantitative easing policies. According to the International Monetary Fund (IMF), these policies helped reduce systemic risks following the collapse of Lehman Brothers. The IMF noted that these policies also helped improve market confidence and enabled the G7 economies to exit recession in the second half of 2009.

However, quantitative easing also has some risks and side effects. If QE requires too much and creates too much money through the purchase of liquid assets, then QE could lead to higher-than-expected inflation. On the other hand, if banks remain reluctant to lend to businesses and households, QE may not be able to stimulate demand. In addition, quantitative easing policies may also cause asset bubbles, currency wars, financial instability and other problems.

Conclusion

Quantitative easing is an unconventional monetary policy designed to further stimulate the economy and inflation when interest rates are already at extremely low levels. Quantitative easing means the central bank purchases government bonds and other securities through open market operations to increase the money supply. The effect of quantitative easing depends on its scale, timing, persistence and signaling effect, as well as the coordination of other policies. Quantitative easing also has some risks and side effects, requiring the central bank to flexibly adjust and exit based on changes in the economic and financial environment.