Quantitative easing

Quantitative easing is a tool of monetary policy. It effectively means that the central bank injects new money into the financial system, in order to increase the supply of money. 'Quantitative' refers to the money supply; 'easing' refers to reducing the pressure on banks. A central bank can do this by buying government bonds (Treasury securities in the United States) in the open market, or by lending money to deposit-taking institutions, or by buying assets from banks in exchange for currency, or any combination of these actions. These have the effects of reducing interest yields on government bonds, and reducing inter-bank overnight interest rates, and thereby encourage banks to loan money to higher interest-paying bodies. In layman's terms, the central bank creates more money (an asset) and offsets this by selling debt notes (an offset liability) to interested buyers. As of 1998, the US Federal Reserve held about 40% of its own debt.

Quantitative easing was used notably by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s. More recently during the global financial crisis of 2008, policies announced by the US Federal Reserve under Ben Bernanke to counter the effects of the crisis have been likened to quantitative easing coupled with the issuance of new debt on the US federal balance sheet.

In Japan's case, the BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. With quantitative easing, it flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves, and therefore little risk of a liquidity shortage. The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities, equities, and extended the terms of its commercial paper purchasing operation. Despite Japan's sustained near zero interest rates, the quantitative easing strategy did not succeed in stopping price deflation.

See also

• Economic history of Japan
• Economy of Japan

External links

• Deflation: Making Sure "It" Doesn't Happen Here, 2002 speech by Ben Bernanke on deflation and the utility of quantitative easing
• Money as Debt also known as Credit, blog by Sabine K McNeill
• Understanding Quantitative Easing, S. Wade Hansen, Learning Markets