March 21, 2021

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What is Quantitative Easing and its Benefits?

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Question(s):

What is Quantitative Easing and its advantages/disadvantages?

Answer:

In efforts to improve economic growth, the Central Banks may use Quantitative Easing. Central Banks can buy different assets in order to improve the economic growth. A common investment is in Bonds. By such an investment, Central Banks are injecting money into the economy, which can help increase the growth of businesses.

As the Central Banks invest money in different assets, the flow/circulation of money increases, which increases the business growth. A simple rule is that, when demand for a product increases, the product price can possibly increase too. In case of Bonds, when demand increases, the value of Bond increases where the return/profit is decreased. As the demand increases, more and more investors buy Bonds. The party that issues the Bonds will benefit, as the return/profit will decrease and they are selling more Bonds.

QE isn’t always the best solution

The main banking authority, the central banks, is responsible for keeping a healthy inflation rate. If inflation rate is high, they increase the base interest-rate to encourage people to invest money. This also means that bank loans decrease. If inflation-rate is low, then the central-bank decrease the overnight interest-rate. This is to discourage people from putting money in savings for getting interest. Central-bank then want people to spend more money; they want the banks to approve more loans as well.

In theory, QE should work like charm, but in reality, it cannot always produce the deserved results. Studies have shown that QE isn’t always the best solution when it comes to raising inflation-rate. To improve economy as a whole, the government needs to do a lot more like, create new jobs, reduce its own spending etc.

What are the Disadvantages of Quantitative Easing?

Investing money in assets means that the government will need more money and how can they get it? By printing more money

Experts believe that in normal circumstances, printing more money increases Inflation that can negatively affect the overall economy. Investors usually take the news of Quantitative Easing negatively especially in stock markets.

Check the following links for further study:

1. Quantitative easing – Wikipedia, the free encyclopedia
2. What is quantitative easing? – BBC News
3. What is Quantitative Easing? | Bank of England
4. How Quantitative Easing Works – Positive Money
5. Economics explainer: What is Quantitative Easing?
6. Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses
7. Four Stories of Quantitative Easing
8. Quantitative Easing and Financial Stability
9. The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy
10. Explained: Quantitative easing
11. Constraints and Implications for Quantitative Easing
12. Quantitative Easing by the European Central Bank
13. Quantitative Easing in the Great Recession
14. The End of Quantitative Easing

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