Quantitative easing
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Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds, company shares, or other financial assets (liquidity) in order to artificially stimulate economic activity. Quantitative easing is a novel form of monetary policy that began in Japan and came into wide application in the U.S. following the 2008 financial crisis. It attempts to mitigate economic recessions when inflation is very low or negative. Quantitative tightening does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.
Similar to conventional open-market operations used to implement monetary policy, 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. However, in contrast to conventional monetary policy, quantitative easing usually involves the purchase of riskier or longer-term assets (rather than short-term government bonds) of predetermined amounts at a large scale, over a pre-determined period of time.
Central banks usually resort to quantitative easing when interest rates approach zero, such as in 2008 and 2020 for the U.S. and in 1999 for Japan. Very low interest rates induce a liquidity trap, a situation where people prefer to hold cash or very liquid assets, given the low returns on other financial assets. This makes it difficult for interest rates to go below zero; monetary authorities may then use quantitative easing to stimulate the economy rather than trying to lower the interest rate. Quantitative easing can help bring the economy out of a recession and help ensure that inflation does not fall below the central bank's inflation target.
The term quantitative easing was coined by economist Richard Werner in 1995. Since then, it has faced a range of criticisms. Economists argue that it can inflate asset bubbles, potentially worsening a recession rather than alleviating it. Others highlight QE's mixed side effects and risks: it may overshoot its goal by countering deflation too aggressively and fueling long-term inflation, or fail to stimulate growth if banks remain reluctant to lend and borrowers hesitant to borrow. QE has also been criticized for raising financial asset prices, and thereby contributing to economic inequality. Major central banks around the world, including the U.S., U.K., E.U., and Japan, have implemented quantitative easing following the 2008 global financial crisis and again in response to the COVID-19 pandemic.