harvey_mayway
February 19th, 2009, 04:38 PM
Quantitative easing is a term for when a central bank creates money out of thin air to inject into the banking system. The aim is to increase the amount of deposits in private banksso that, by way of Deposit multiplication, they can increase the money supply by increasing debt[lending].
'Quantitative' refers to the money supply; 'easing' refers to reducing the pressure on banks.
A central bank can do this by buying government bonds 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 (e.g you and me).
In layman's terms, the central bank creates more money (a liability for the central bank) and uses this money to buy securities in the open market (an asset).
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. The US Federal Reserve held about 40% of US government debt.
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.
Willem Buiter has proposed a terminology to distinguish quantitative easing,
"Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is monetary liabilities
'Quantitative' refers to the money supply; 'easing' refers to reducing the pressure on banks.
A central bank can do this by buying government bonds 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 (e.g you and me).
In layman's terms, the central bank creates more money (a liability for the central bank) and uses this money to buy securities in the open market (an asset).
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. The US Federal Reserve held about 40% of US government debt.
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.
Willem Buiter has proposed a terminology to distinguish quantitative easing,
"Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is monetary liabilities