Quantitative easing

Quantitative easing (QE) is a monetary policy in which a central bank creates new electronic money in order to buy government bonds or other financial assets to stimulate the economy (i.e., to increase private-sector spending and return inflation to its target). An unconventional form of monetary policy, it is usually used when standard monetary policy has become ineffective at combating a falling money supply. 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 lower short-term market interest rates. However, when short-term interest rates reach or approach zero, this method can no longer work. In such circumstances, monetary authorities may then use quantitative easing to further stimulate the economy by buying assets of longer maturity than short-term government bonds, thereby lowering longer-term interest rates further out on the yield curve.

Quantitative easing can help ensure that inflation does not fall below a target. Risks include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term, due to increased money supply), 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 U.S. Federal Reserve System, and various economists, quantitative easing undertaken since the global financial crisis of 2007–08 has mitigated some of the economic problems since the crisis.

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