What is Quantitative Easing?

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2021-03-24 03:40:39

Quantitative Easing (QE) is done by the central bank buying a quantity of securities in the market, increasing the money supply and providing liquidity to the banks.

Quantitative easing

Concept

Quantitative easing in English is Quantitative Easing, abbreviated as QE.

Quantitative easing A unique monetary policy in which a central bank buys government bonds or other securities in the market to increase the money supply and encourage lending and investment.

When short-term interest rates are at or near zero, the usual open market operations that influence interest rates are no longer ineffective. Instead, the central bank may aim to buy a certain amount of assets.

Quantitative easing increases the money supply by buying assets with the newly created bank reserves to provide more liquidity to banks.

The essence of quantitative easing

To start quantitative easing, the central banks increase the money supply by buying government bonds and other securities. An increase in the money supply has the same effect as an increase in the supply of any other asset – it reduces the cost of money.

Lower cost of money means lower interest rates and banks can lend with lower standards. This strategy is used when interest rates are close to zero, then the central banks have few tools to influence economic growth.

If the work quantitative easing losing efficiency, the government can use fiscal policy to further expand the money supply. In fact, quantitative easing can even blur the line between monetary and fiscal policy, if the assets are bought including long-term government bonds issued to finance counter-cyclical deficit spending.

Disadvantages of quantitative easing

If central banks increase the money supply, it can cause inflation. In the worst case, the central bank uses it quantitative easing can cause inflation without economic growth, leading to a period known as stagflation.

Although most central banks are created by their own governments and perform some regulatory oversight roles, central banks cannot force banks to increase lending or force citizens have to borrow and invest.

If an increase in money supply does not flow through the bank into the economy, quantitative easing may be ineffective except leading to a deficit in government spending.

Another negative consequence is quantitative easing can devalue the local currency. For manufacturers, this can help stimulate growth as exported goods will be cheaper in the global market. However, a decrease in the value of the local currency makes imported goods and services more expensive, possibly increasing production costs and consumer prices.


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