QUANTITATIVE EASING
Quantitative easing (QE) is a monetary policy whereby a central bank buys government bonds or
other financial assets in order to inject money into the economy to expand economic activity.[1]
An unconventional form of monetary policy,[2] it is usually used when inflation is very low or
negative, and standard expansionary monetary policy has become ineffective. 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. This differs from the more usual policy of
buying or selling short-term government bonds to keep interbank interest rates at a specified
target value.
Expansionary monetary policy to stimulate the economy typically involves the central bank
buying short-term government bonds to decrease short-term market interest rates. However,
when short-term interest rates approach or reach zero, this method can no longer work (a
situation known as a liquidity trap). In such circumstances, monetary authorities may then use
quantitative easing to further stimulate the economy, by buying financial assets without
reference to interest rates, and by buying riskier or longer maturity assets (other than short-term
government bonds), thereby lowering interest rates further out on the yield curve.
Quantitative easing can help bring the economy out of recession[3] and help ensure that
inflation does not fall below the central bank's inflation target.[4] Risks 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. According to the International Monetary Fund, the US Federal Reserve
System, and various other economists, quantitative easing undertaken following the global
financial crisis of 2007–08 mitigated some of the economic problems after the crisis. It has also
been used by the Federal Reserve in the response to the COVID-19 pandemic in the United
States.
