Quantitative Easing

Definition of Quantitative Easing

Quantitative Easing is an unconventional monetary policy in which the central bank purchases monetary instruments and financial assets from commercial banks in order to stimulate the economy, and increase the monetary base. It comes into play when the standard monetary policy becomes ineffective, and the market seeks an external catalyst to stimulate the economy.[1]


Arguments in the favor of Quantitative Easing

In the wake of recession, governments tend to apply expansionary monetary policy in order to bring down the interest rate and stimulate the economy, but when the interest rate nears zero then the monetary policy renders useless. In such situations, the central bank starts buying monetary assets from commercial banks and other financial institutes so that there is an influx of money into the market.[2][3]

The purchase of the assets by the central bank makes them more valuable which in turn lowers their yield. As they become more expensive to buy, banks and financial institutes give preference to using that incoming money in issuing other assets such as stock and bonds over buying any more of the same assets. This leads to a situation in which all the financial institutes are willing to lend money and invest in other companies causing drop in the interest rates. Accordingly, an increase in the spending habits is noticed, and the economy is stabilized.[4]


Applications of Quantitative Easing

Quantitative Easing has been an essential part of Japanese economy since the late 1990s. As a matter of fact, Japan was the very first country to make use of QE. In the course of time, QE found its way to USA and major European countries when these countries were hit with recession.[5] As of July 2013, the US Federal Reserve is engaged in QE with a budget of $85 billion/month.[6] However, the Fed announced in June 2013 that they intend on tapering the stimulus efforts owing to increased stability in the economy, progress in the job market, and a steady inflation rate. It was further revealed that QE3 will be brought to a complete halt by mid-2014.[7]

The movement in the Japanese stock market in June 2013 also showcased how QE can backfire, and lead to something totally unexpected. Bank of Japan was adding to money to the economy through QE at a rapid pace, and Nikkei was on the rise till it witnessed a major sell-off that plunged Nikkei into the bear market. [8]

QE also presented its merits during its time of operation. In the UK, it was observed that the purchase of bonds by the central bank did, indeed, bring down the yield, and consequently, the interest rate as well. Therefore, as the borrowing rate dwindled, household’s net financial wealth boosted by 16%. QE also enhanced the economy of UK by 2%. [9]

Basically, the need for QE arises when there is a sharp fall in the expenditure habits of consumers and businesses. This is a very unfavorable situation as it means that there isn’t enough money in the economy. The aim is to boost spending, and reach desired levels of inflation with its support.[4]


  1. http://www.economist.com/node/14649284
  2. http://www.auburn.edu/~johnspm/gloss/open_market_operations
  3. http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
  4. http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx
  5. Revisiting Japan’s Experience of the Quantitative Easing Policy by Shigenori Shiratsuka
  6. http://www.economist.com/blogs/freeexchange/2013/06/monetary-policy-2
  7. http://www.ft.com/intl/cms/s/0/17078b02-d905-11e2-84fa-00144feab7de.html
  8. http://www.cnbc.com/id/100813567
  9. http://www.telegraph.co.uk/finance/personalfinance/interest-rates/8810763/The-case-for-and-against-quantitative-easing.html



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