What Is Quantitative Easing?

Banking CIO Outlook | Thursday, September 16, 2021

Quantitative easing boosts the money supply by buying assets with freshly minted bank reserves, giving banks greater liquidity.

FREMONT, CA: Quantitative easing (QE) is an unorthodox monetary strategy. A central bank buys longer-term assets on the open market to expand the money supply and promote lending and investment. By buying up fixed-income assets, these instruments bring additional money to the economy while also helping to decrease interest rates. However, it also increases the size of the central bank's balance sheet.

A central bank's typical open market activities that target interest rates are no longer viable when short-term interest rates are at or near zero. Instead, a central bank might acquire a specific quantity of assets. In addition, quantitative easing boosts the money supply by buying assets with freshly minted bank reserves, giving banks greater liquidity.

Understanding What is Quantitative Easing (QE)

Top 10 Retail Banking Solution Companies - 2018Central banks use quantitative easing to expand the money supply by purchasing government bonds and other securities. Interest rates get reduced when the money supply increases. Banks can lend on more favorable conditions when interest rates are low. Because central banks have fewer instruments to affect economic development at this stage, quantitative easing is usually conducted when interest rates are already near zero.

If quantitative easing fails to work, a government's fiscal policy might get employed to grow the money supply further. Quantitative easing could be a mix of monetary and fiscal policy, such as when a government buys assets like long-term government bonds to support counter-cyclical deficit expenditure.

Quantitative easing is a monetary policy wherein the country's central bank purchases long-term government bonds from the country's major banks to enhance liquidity in the financial system. The Bank of Japan (BoJ) first utilized quantitative easing in 2001, but the United States and numerous other nations followed suit. 16 The central bank wants to boost economic growth by allowing banks to lend and invest more freely by acquiring these securities from banks.

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