Quantitative Easing
1. What is the difference between QE (quantitative easing) and more orthodox open market operations conducted by central banks?
During the period of 1986 to 1991, the Japanese economy was experiencing an economic bubble that was characterized by highly inflated real estate and stock prices. The subsequent effects of the bubble’s inevitable collapse lasted over a decade with the stock prices reaching their lowest values during the year 2003. It was during this recessionary period of the early 2000s that the Japanese government began to purchase long-term government debt from banks as a means to decrease interest rates and to entice more investment and consumer spending; a feat that was somehow next to impossible for the incredibly low interest rates that already existed in the market. This newly engineered process of monetary policy pioneered by the Japanese was given the name quantitative easing. Since its conception, quantitative easing has been used by several different central banks such as the Federal Reserve and the Bank of England during the global financial crisis of 2008. However, despite the popular use of the mechanism, it is important to note that the process of quantitative easing varies greatly from the process of conventional monetary policy and the totality of its affects are currently under heavy debate by academics. To begin fully understanding quantitative easing and its implications, it may first be easiest to establish what conventional monetary policy is and its purpose. During inflationary and deflationary periods, central banks generally employ conventional monetary policy in order to stabilize the economy. Typically this goal is achieved by conducting open market operations with banks and financial institutions as a means to control the money supply in the economy. During a period of inflation, which is often driven by an excess of loans given out by banks, the central bank will sell short-term government securities to the banks.
During the period of 1986 to 1991, the Japanese economy was experiencing an economic bubble that was characterized by highly inflated real estate and stock prices. The subsequent effects of the bubble’s inevitable collapse lasted over a decade with the stock prices reaching their lowest values during the year 2003. It was during this recessionary period of the early 2000s that the Japanese government began to purchase long-term government debt from banks as a means to decrease interest rates and to entice more investment and consumer spending; a feat that was somehow next to impossible for the incredibly low interest rates that already existed in the market. This newly engineered process of monetary policy pioneered by the Japanese was given the name quantitative easing. Since its conception, quantitative easing has been used by several different central banks such as the Federal Reserve and the Bank of England during the global financial crisis of 2008. However, despite the popular use of the mechanism, it is important to note that the process of quantitative easing varies greatly from the process of conventional monetary policy and the totality of its affects are currently under heavy debate by academics. To begin fully understanding quantitative easing and its implications, it may first be easiest to establish what conventional monetary policy is and its purpose. During inflationary and deflationary periods, central banks generally employ conventional monetary policy in order to stabilize the economy. Typically this goal is achieved by conducting open market operations with banks and financial institutions as a means to control the money supply in the economy. During a period of inflation, which is often driven by an excess of loans given out by banks, the central bank will sell short-term government securities to the banks.
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