Quantitative Easing

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Term Definition
Quantitative Easing

A monetary policy tool where a central bank increases the money supply by purchasing government bonds and other securities

Quantitative easing (QE) is a monetary policy tool used by central banks to stimulate economic growth by increasing the money supply in the economy.

Here's how it works:

  • Central bank purchases assets: The central bank purchases financial assets such as government bonds, corporate bonds, or other securities from financial institutions. This injects new money into the financial system.
  • Increased money supply: With more money available, interest rates typically tend to fall. This makes borrowing cheaper for businesses and consumers, encouraging them to invest and spend, which boosts economic activity.
  • Increased asset prices: The increased demand for these assets by the central bank also pushes up their prices, potentially stimulating wealth creation and further investment.

However, QE is not without its critics:

  • Inflation concerns: Increased money supply can lead to inflation, if not managed carefully.
  • Asset bubbles: QE can contribute to the creation of asset bubbles as asset prices rise sharply.
  • Moral hazard: It may encourage excessive risk-taking by businesses and investors, potentially leading to financial instability.

Here are some additional points to consider:

  • The specific methods and targets of QE can vary depending on the central bank and the economic situation.
  • QE is often used in conjunction with other monetary policy tools like interest rate adjustments.
  • The effectiveness of QE is debated and depends on various factors, including the economic context and implementation details.
Synonyms: QE