Quantitative easing

Since the advent of the financial crisis in 2008, some of the world’s largest Central Banks, namely the US Federal Reserve (Fed), the Bank of England (BOE), the Bank of Japan (BOJ), and the European Central Bank (ECB), among others, have embarked on monetary easing or quantitative easing. This is an unorthodox way of pumping money into the economy and aiming to lower the long-term interest rates in order to combat a recession. Since interest rates in industrial countries had declined to near zero in the aftermath of the global crisis, the scope for further monetary easing through lower policy rates became very limited. Quantitative easing (QE) and other asset purchase programs have therefore been adopted under exceptional circumstances. Japan is credited as the first country that started implementing QE in 2001. But it was not until the 2008 financial crisis that Central Banks of developed countries started using QE regularly to stimulate their economies, increase bank lending, and encourage spending.
The real estate bubble which burst in 2007 in the USA caused the 2008 financial crisis, and the more recent Eurozone sovereign debt crisis have obliged leading Central Banks to opt for aggressive monetary actions such as QE in order to prevent financial instability. The USA introduced QE1 in 2008, QE2 in 2010, and “Operation Twist” (OT) in 2011, and more recently the third round of QE (QE3) in 2012, which consisted of a monthly $85-billion injection through the purchase of mortgage-backed securities and longer-term Treasury securities. The Fed buys government or other bonds and then makes this money available for banks to borrow, thereby expanding the amount of money circulating in the economy, which in turn reduces long-term interest rates. Of late, it has begun to unwiden the program as the “tapering” takes root at the beginning of 2014.
In the UK, the BOE incrementally raises the ceiling of its QE asset purchase program to £375 billion, most of which is used to