Quantitative easing is a monetary policy used by central banks to encourage economic growth.
It involves a central bank creating large sums of money and then using that cash to buy securities, almost always government bonds, in the market. The goal of quantitative easing is to encourage investment and lending, which in turn bolsters economic activity.
Though it had been used before by Japan’s central bank previously, quantitative easing policies were introduced by many central banks after the 2007 financial crisis. Similar steps were taken by governments around the world during the 2020 COVID-19 pandemic.
Quantitative easing continues to divide policymakers, with some saying it has saved economies from collapse and others blaming it for inflation.
How does quantitative easing work?
To fully understand quantitative easing, you need to know a little bit about central banks. In short, central banks are responsible for monetary policies that have a huge impact on economies.
There are two main ways that they do this; setting interest rates and controlling the supply of money.
When central banks lower interest rates and increase the supply of money, it becomes cheaper for people to borrow money and this can, in theory, stimulate more investing and spending that boosts the economy.
The reverse is also true. Less money and higher interest rates mean it becomes harder to borrow, though there could be benefits to this too.
Quantitative easing is when a central bank creates money and then uses it to buy government bonds in the open market.
The logic behind this move is that the money the central bank has created is then passed into the economy and encourages more lending and spending.
What is the impact of quantitative easing?
There is a lot of controversy around quantitative easing. Supporters say that it has been vital in keeping economies afloat and ensuring fiscal and political stability in times of economic crisis.
Opponents of the policy say that it can lead to currency inflation, though it’s not clear that this is the case.
There is also an argument to be made that quantitative easing inflates prices in the stock market. This is because it is generally accompanied by lower interest rates.
Because of these lower interest rates and the greater supply of money in the economy, people don’t want to keep their money in savings accounts that don’t beat the rate of inflation. Instead, they put it into the stock market, which can lead to market bubbles.
