Quantitative Easing

• Quantitative Easing (QE)


  A monetary policy tool used when traditional approaches to monetary policy have failed in achieving their objective
• QE is used not just in the UK but in lots of other Advanced nations in the world as well
• Why QE was adopted


  Traditional approaches like lowering interest rates to stimulate aggregate demand failed for 3 main reasons: 1) Low availability of credit, 2) Low consumer and business confidence, 3) Lack of willingness for banks to lend
• How QE works

  1. Central Bank electronically creates money and puts it on its balance sheet

  2. Central Bank uses this money to buy financial assets, especially government bonds, from financial institutions

  3. This increases demand for government bonds, pushing up their prices and lowering their yields

  4. Financial institutions now have cash instead of government bonds, which they can use to invest in other assets like corporate bonds or shares

  5. Increased demand for corporate bonds lowers their yields, making it cheaper for companies to borrow

  6. This increases the willingness and ability of commercial banks to lend to individuals and businesses at lower interest rates
• Lowering yields on government and corporate bonds

  Reduces the general cost of borrowing in the economy, bringing market interest rates closer to the Bank of England base rate
• The intention of QE is to increase aggregate demand by increasing borrowing, spending and investment
• It is difficult to tell whether QE has been effective or not