What is quantitative easing?

Definition Quantitative Easing. This involves the Central Bank increasing the money supply and using these electronically created funds to buy government bonds or other securities. Quantitative easing is a form of expansionary monetary policy. It is usually used in a liquidity trap – when base interest rates cannot be cut any further.

Which countries use quantitative easing?

The Bank of Japan has been one of the most ardent champions of quantitative easing, deploying this policy for more than a decade. The European Central Bank and the Bank of England also used QE in the wake of the global financial crisis that began in 2007.

What happens if the Central Bank reverses quantitative easing?

There will come a point when the Central Bank reverse the policy of quantitative easing. They will sell the bonds they have accumulated on the bond market. This will cause interest rates to rise, and reduce the growth of the money supply.

Is quantitative easing a solution to a liquidity trap?

Quantitative easing is often suggested as a solution to a liquidity trap . A liquidity trap occurs when cutting interest rates fail to boost economic activity. This is because despite low-interest rates, banks are reluctant to lend and/or consumers are reluctant to borrow. Quantitative easing is also seen as a solution to deflation.