Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when monetary policy has become ineffective.
A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to change the money supply, in order to keep market interest rates at a specified target value.
Expansionary monetery policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates (as money supply increases). However, when short-term interest rates are either at, or close to zero, normal monetary policy can no longer lower interest rates. Quantitative easing may than be used by the monetary authorities tofurther stimulate the economy by purchasing assets of longer maturity than only short-term government bonds, and thenby lowering longer-term interest rates further out on the yiel curve. Quantitative easing raises the prices of the financial assets bought, which lowers their yield.
Quantitative easing can be used to help ensure that inflation does not fall below target.
According to IMF and various other economists, quantitative easing undertaken since the global financial crisis has mitigated the adverse effects of the crisis.
Exemples: In Japan
Quantitative easing was used unsuccessfully by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s. The Bank of Japan has maintained short-term interest rates at close to zero since 1999. With quantitative easing, it flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves, and therefore little risk of a liquidity shortage. The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities and equities, and extended the terms of its commercial paper purchasing operation.The original Japanese expression for quantitative easing (量的金融緩和, ryōteki kin’yū kanwa), was used for the first time by a Central Bank in the Bank of Japan’s publications. The Bank of Japan has claimed that the central bank adopted a policy with this name on 19 March 2001. However, the Bank of Japan’s official monetary policy announcement of this date does not make any use of this expression (or any phrase using “quantitative”) in either the Japanese original statement or its English translation. Indeed, the Bank of Japan had for years, including as late as February 2001, claimed that “quantitative easing … is not effective” and rejected its use for monetary policy. Speeches by the Bank of Japan leadership in 2001 gradually, and ex post, hardened the subsequent official Bank of Japan stance that the policy adopted by the Bank of Japan on 19 March 2001 was in fact quantitative easing. This became the established official view, especially after Toshihiko Fukui was appointed governor in February 2003. The use by the Bank of Japan is not the origin of the term quantitative easing or its Japanese original (ryoteki kinyu kanwa). This expression had been used since the mid-1990s by critics of the Bank of Japan and its monetary policy.