Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity.[1] Quantitative easing is a novel form of monetary policy that came into wide application after the financial crisis of 2007–2008.[2][3] It is used to mitigate an economic recession when inflation is very low or negative, making standard monetary policy ineffective. Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.
Similar to conventional open-market operations used to implement monetary policy, a central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. However, in contrast to normal policy, quantitative easing usually involves the purchase of riskier or longer-term assets (rather than short-term government bonds) of predetermined amounts at a large scale, over a pre-committed period of time.[4][5]
Central banks usually resort to quantitative easing when interest rates approach zero. Very low interest rates induce a liquidity trap, a situation where people prefer to hold cash or very liquid assets, given the low returns on other financial assets. This makes it difficult for interest rates to go below zero; monetary authorities may then use quantitative easing to stimulate the economy rather than trying to lower the interest rate.
Quantitative easing can help bring the economy out of recession[6] and help ensure that inflation does not fall below the central bank's inflation target.[7] However QE programmes are also criticized for their side-effects and risks, which include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term), or not being effective enough if banks remain reluctant to lend and potential borrowers are unwilling to borrow. Quantitative easing has also been criticized for raising financial asset prices, contributing to inequality.[8] Quantitative easing was undertaken by some major central banks worldwide following the global financial crisis of 2007–2008, and again in response to the COVID-19 pandemic.[9]
Standard central bank monetary policies are usually enacted by buying or selling government bonds on the open market to reach a desired target for the interbank interest rate. However, if a recession or depression continues even when a central bank has lowered interest rates targets to nearly zero, the central bank can no longer lower interest rates — a situation known as the liquidity trap. The central bank may then attempt to stimulate the economy by implementing quantitative easing, that is, by buying financial assets without reference to interest rates. This policy is sometimes described as a last resort to stimulate the economy.[10][11]
A central bank enacts quantitative easing by purchasing, regardless of interest rates, a predetermined quantity of bonds or other financial assets on financial markets from private financial institutions.[12][13] This action increases the excess reserves that banks hold. The goal of this policy is to ease financial conditions, increase market liquidity, and encourage private bank lending.
Quantitative easing affects the economy through several channels:[14]
Credit channel: By providing liquidity in the banking sector, QE makes it easier and cheaper for banks to extend loans to companies and households, thus stimulating credit growth. Additionally, if the central bank also purchases financial instruments that are riskier than government bonds (such as corporate bonds), it can also increase the price and lower the interest yield of these riskier assets.[citation needed]
Portfolio rebalancing: By enacting QE, the central bank withdraws an important part of the safe assets from the market onto its own balance sheet, which may result in private investors turning to other financial securities. Because of the relative lack of government bonds, investors are forced to "rebalance their portfolios" into other assets. Additionally, if the central bank also purchases financial instruments that are riskier than government bonds, it can also lower the interest yield of those assets (as those assets are more scarce in the market, and thus their prices go up correspondingly).[15]
Exchange rate: Because it increases the money supply and lowers the yield of financial assets, QE tends to depreciate a country's exchange rates relative to other currencies, through the interest rate mechanism.[16] Lower interest rates lead to a capital outflow from a country, thereby reducing foreign demand for a country's money, leading to a weaker currency. This increases demand for exports, and directly benefits exporters and export industries in the country.[citation needed]
Fiscal effect: By lowering yields on sovereign bonds, QE makes it cheaper for governments to borrow on financial markets, which may empower the government to provide fiscal stimulus to the economy. Quantitative easing can be viewed as a debt refinancing operation of the "consolidated government" (the government including the central bank), whereby the consolidated government, via the central bank, retires government debt securities and refinances them into central bank reserves.[citation needed]
Boosting asset prices: When a central bank buys government bonds from a pension fund, the pension fund, rather than hold on to this money, might invest it in financial assets, such as shares, that gives it a higher return. And when demand for financial assets is high, the value of these assets increases. This makes businesses and households holding shares wealthier – making them more likely to spend more, boosting economic activity.[citation needed]
Signalling effect: Some economists argue that QE's main impact is due to its effect on the psychology of the markets, by signaling that the central bank will take extraordinary measures to facilitate economic recovery. For instance, it has been observed that most of the effect of QE in the Eurozone on bond yields happened between the date of the announcement of QE and the actual start of the purchases by the ECB.[citation needed]
History
Quantitative Easing was proposed in a 1995 article in the Nikkei financial newspaper by Richard Werner, a German economist.[17] The Bank of Japan introduced QE from March 19, 2001, until March 2006, after having introduced negative interest rates in 1999. Most western central banks adopted similar policies in the aftermath of the great financial crisis of 2008.[18]
The US Federal Reserve belatedly implemented policies similar to the recent quantitative easing during the Great Depression of the 1930s.[20][21] Specifically, banks' excess reserves exceeded 6 percent in 1940, whereas they vanished during the entire postwar period until 2008.[22] Despite this fact, many commentators called the scope of the Federal Reserve quantitative easing program after the 2008 crisis "unprecedented".[23][24][25]
Japan (2001–2006)
A policy termed "quantitative easing" (量的緩和, ryōteki kanwa, from 量的 "quantitative" + 緩和 "easing")[26] was first used by the Bank of Japan (BoJ) to fight domestic deflation in the early 2000s.[27][28] The BOJ had maintained short-term interest rates at close to zero since 1999. The Bank of Japan had for many years, and as late as February 2001, stated that "quantitative easing ... is not effective" and rejected its use for monetary policy.[29]
The Bank of Japan adopted quantitative easing on 19 March 2001.[30][31] Under quantitative easing, the BOJ 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.[32] The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It later also bought asset-backed securities and equities and extended the terms of its commercial paper-purchasing operation.[33] The BOJ increased commercial bank current account balances from ¥5trillion to ¥35 trillion (approximately US$300 billion) over a four-year period starting in March 2001. The BOJ also tripled the quantity of long-term Japan government bonds it could purchase on a monthly basis.[citation needed] However, the seven-fold increase notwithstanding, current account balances (essentially central bank reserves) being just one (usually relatively small) component of the liability side of a central bank's balance sheet (the main one being banknotes), the resulting peak increase in the BOJ's balance sheet was modest, compared to later actions by other central banks.[citation needed] The Bank of Japan phased out the QE policy in March 2006.[34]
After 2007
After the financial crisis of 2007–2008, policies similar to those undertaken by Japan were used by the United States, the United Kingdom, and the Eurozone. Quantitative easing was used by these countries because their risk-free short-term nominal interest rates (termed the federal funds rate in the US, or the official bank rate in the UK) were either at or close to zero. According to Thomas Oatley, "QE has been the central pillar of post-crisis economic policy."[3]
During the peak of the financial crisis in 2008, the US Federal Reserve expanded its balance sheet dramatically by adding new assets and new liabilities without "sterilizing" these by corresponding subtractions. In the same period, the United Kingdom also used quantitative easing as an additional arm of its monetary policy to alleviate its financial crisis.[35][36][37]
United States
Federal Reserve holdings of treasury notes (blue) and mortgage-backed securities (red)
The U.S. Federal Reserve System held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession.
November 2008: QE1. In late November 2008, the Federal Reserve started buying $600 billion in mortgage-backed securities.[38] By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes; this amount reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June, holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to keep holdings at $2.054 trillion. To maintain that level, the Fed bought $30 billion in two- to ten-year Treasury notes every month.[39]
November 2010: QE2. In November 2010, the Fed announced a second round of quantitative easing, buying $600 billion of Treasury securities by the end of the second quarter of 2011.[40][41] The expression "QE2" became a ubiquitous nickname in 2010, used to refer to this second round of quantitative easing by US central banks.[42] Retrospectively, the round of quantitative easing preceding QE2 was called "QE1".[43][44]
September 2012: QE3. A third round of quantitative easing, "QE3", was announced on 13 September 2012. In an 11–1 vote, the Federal Reserve decided to launch a new $40 billion per month, open-ended bond purchasing program of agency mortgage-backed securities. Additionally, the Federal Open Market Committee (FOMC) announced that it would likely maintain the federal funds rate near zero "at least through 2015".[45][46] According to NASDAQ.com, this is effectively a stimulus program that allows the Federal Reserve to relieve $40 billion per month of commercial housing market debt risk.[47] Because of its open-ended nature, QE3 has earned the popular nickname of "QE-Infinity".[48][bettersourceneeded] On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.[49]
On 19 June 2013, Ben Bernanke announced a "tapering" of some of the Fed's QE policies contingent upon continued positive economic data. Specifically, he said that the Fed could scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting.[50][51] He also suggested that the bond-buying program could wrap up by mid-2014.[52] While Bernanke did not announce an interest rate hike, he suggested that if inflation followed a 2% target rate and unemployment decreased to 6.5%, the Fed would likely start raising rates. The stock markets dropped by approximately 4.3% over the three trading days following Bernanke's announcement, with the Dow Jones dropping 659 points between 19 and 24 June, closing at 14,660 at the end of the day on 24 June.[53] On 18 September 2013, the Fed decided to hold off on scaling back its bond-buying program,[54] and announced in December 2013 that it would begin to taper its purchases in January 2014.[55] Purchases were halted on 29 October 2014[56] after accumulating $4.5 trillion in assets.[57]
Increase in US Federal Reserve assets in response to COVID-19 pandemic
The Federal Reserve began conducting its fourth quantitative easing operation since the 2008 financial crisis; on 15 March 2020, it announced approximately $700 billion in new quantitative easing via asset purchases to support US liquidity in response to the COVID-19 pandemic.[59] As of mid-summer 2020 this resulted in an additional $2 trillion in assets on the books of the Federal Reserve.[60]
United Kingdom
Immediate and delayed effects of quantitative easing
The Bank of England's QE programme commenced in March 2009, when it purchased around £165 billion in assets as of September 2009 and around £175 billion in assets by the end of October 2009.[62] Five further tranches of bond purchases between 2009 and November 2020 brought the peak QE total to £895 billion.[63]
The Bank imposed a number of constraints on the QE policy, namely, that it would not buy more than 70% of any issue of government debt; and that it would only buy traditional (non-index-linked) debt, with a maturity of more than three years.[64] Originally, the bonds eligible for purchase were limited to UK government debt, but this was later relaxed to include high quality commercial bonds.[65]
QE was primarily designed as an instrument of monetary policy. The mechanism required the Bank of England to purchase government bonds on the secondary market, financed by the creation of new central bank money. This would have the effect of increasing the asset prices of the bonds purchased, thereby lowering yields and dampening longer term interest rates and making it cheaper for businesses to raise capital.[66] The aim of the policy was initially to ease liquidity constraints in the sterling reserves system, but evolved into a wider policy to provide economic stimulus. Another side effect is that investors will switch to other investments, such as shares, boosting their price and thus encouraging consumption.[67] In 2012 the Bank estimated that quantitative easing had benefited households differentially according to the assets they hold; richer households have more assets.[68]
In February 2022 the Bank of England announced its intention to commence winding down the QE portfolio.[69] Initially this would be achieved by not replacing tranches of maturing bonds, and would later be accelerated through active bond sales.
In August 2022 the Bank of England reiterated its intention to accelerate the QE wind down through active bond sales. This policy was affirmed in an exchange of letters between the Bank of England and the UK Chancellor of the Exchequer in September 2022.[70] Between February 2022 and September 2022, a total of £37.1bn of government bonds matured, reducing the outstanding stock from £875.0bn at the end of 2021 to £837.9bn. In addition, a total of £1.1bn of corporate bonds matured, reducing the stock from £20.0bn to £18.9bn, with sales of the remaining stock planned to begin on 27 September.
On 28 September 2022 the Bank of England issued a Market Notice announcing its intention to "carry out purchases of long dated gilts in a temporary and targeted way".[71] This was in response to market conditions in which the sterling exchange rate and bond asset pricing were significantly disrupted following a UK government fiscal statement.[72] The Bank stated its announcement would apply to conventional gilts of residual maturity greater than 20 years in the secondary market. The existing constraints applicable to QE bond purchases would continue to apply. The funding of the purchases would be met from central bank reserves, but would be segregated in a different portfolio from existing asset purchases. The Bank also announced that its annual £80bn target to reduce the existing QE portfolio remained unchanged but, in the light of current market conditions, the beginning of gilt sale operations would be postponed to 31 October 2022.[73]
The European Central Bank engaged in large-scale purchase of covered bonds in May 2009,[74] and purchased around €250 billion worth of sovereign bonds from targeted member states in 2010 and 2011 (the SMP Programme). However, until 2015 the ECB refused to openly admit they were doing quantitative easing.[citation needed]
In a dramatic change of policy, following the new Jackson Hole Consensus, on 22 January 2015 Mario Draghi, President of the European Central Bank, announced an "expanded asset purchase programme", where €60 billion per month of euro-area bonds from central governments, agencies and European institutions would be bought.[75]
Beginning in March 2015, the stimulus was planned to last until September 2016 at the earliest with a total QE of at least €1.1 trillion. Mario Draghi announced the programme would continue: "until we see a continued adjustment in the path of inflation", referring to the ECB's need to combat the growing threat of deflation across the eurozone in early 2015.[76][77]
In March 2016, the ECB increased its monthly bond purchases to €80 billion from €60 billion and started to include corporate bonds under the asset purchasing programme and announced new ultra-cheap four-year loans to banks. From November 2019, the ECB resumed buying up eurozone government bonds at a rate of €20 billion in an effort to encourage governments to borrow more and spend in domestic investment projects.[78] In March 2020, to help the economy absorb the shock of the COVID-19 crisis, the ECB announced a €750 billion Pandemic Emergency Purchase Programme (PEPP).[79] The aim of the stimulus package (PEPP) was to lower borrowing costs and increase lending in the euro area.[80]
Switzerland
At the beginning of 2013, the Swiss National Bank had the largest balance sheet relative to the size of its economy. It was responsible for, at close to 100% of Switzerland's national output. A total of 12% of its reserves were in foreign equities. By contrast, the US Federal Reserve's holdings equalled about 20% of US GDP, while the European Central Bank's assets were worth 30% of GDP.[81]
The SNB's balance sheet has increased massively due to its QE programme, to the extent that in December 2020, the US treasury accused Switzerland of being a "currency manipulator". The US administration recommended Switzerland to increase the retirement age for Swiss workers to reduce saving assets by the Swiss Social Security administration, in order to boost domestic demand and reduce the necessity to maintain QE to stabilize the parity between the dollar and the Swiss franc.[82]
Sweden
Sveriges Riksbank launched quantitative easing in February 2015, announcing government bond purchases of nearly US$1.2 billion.[83] The annualised inflation rate in January 2015 was -0.3%, and the bank implied that Sweden's economy could slide into deflation.[83]
In early October 2010, the Bank of Japan (BOJ) announced that it would examine the purchase of ¥5trillion (US$60 billion) in assets. This was an attempt to push down the value of the yen against the US dollar to stimulate the domestic economy by making Japanese exports cheaper; however, it was ineffective.[84]
On 4 August 2011 the BOJ announced a unilateral move to increase the commercial bank current account balance from ¥40 trillion (US$504 billion) to a total of ¥50 trillion (US$630 billion).[85][86] In October 2011, the bank expanded its asset purchase program by ¥5trillion ($66bn) to a total of ¥55trillion.[87]
On 4 April 2013, the Bank of Japan announced that it would expand its asset purchase program by ¥60trillion to ¥70trillion per year.[88] The bank hoped to banish deflation and achieve an inflation rate of 2% within two years. This would be achieved through a QE programme worth US$1.4 trillion, an amount so large it is expected to double the money supply.[89] This policy has been named Abenomics, a portmanteau of economic policies from Shinzō Abe, the former Prime Minister of Japan.
On 31 October 2014, the BOJ announced the expansion of its bond buying program, to purchase ¥80 trillion of bonds a year.[90]
In addition to purchases of bonds, Governor Masaaki Shirakawa also directed the BOJ to begin purchasing corporate shares as well as debt securities in October 2010. The BOJ came up with a policy to purchase index ETFs as part of the 2010 Comprehensive Monetary Easing program, which initially placed a cap of ¥450 billion shares with a termination in December 2011. However, later Governor Haruhiko Kuroda replaced the program with the Quantitative and Qualitative Monetary Easing policy which empowered the BOJ to buy ETFs with no cap or termination date, with an increased annual target of ¥1 trillion. The cap was raised multiple times to over ¥19 trillion by March 2018. And in March 16, 2020, following the Covid pandemic, the BOJ doubled its annual ETF purchase target to ¥12 trillion.[91]
Effectiveness of QE
The effectiveness of quantitative easing is the subject of an intense dispute among researchers as it is difficult to separate the effect of quantitative easing from other contemporaneous economic and policy measures, such as negative rates.
Former Federal Reserve ChairmanAlan Greenspan calculated that as of July 2012, there was "very little impact on the economy".[92] Bank deposits in the Fed increased by nearly $4 trillion during QE1-3, closely tracking Fed bond purchases. A different assessment has been offered by Federal Reserve GovernorJeremy Stein, who has said that measures of quantitative easing such as large-scale asset purchases "have played a significant role in supporting economic activity".[93]
While the literature on the topic has grown over time, it has also been shown that central banks' own research on the effectiveness of quantitative easing tends to be optimistic in comparison to research by independent researchers,[94] which could indicate a conflict of interest or cognitive bias in central bank research.
Several studies published in the aftermath of the crisis found that quantitative easing in the US has effectively contributed to lower long term interest rates on a variety of securities as well as lower credit risk. This boosted GDP growth and modestly increased inflation.[95][96][97][98][99][100] A predictable but unintended consequence of the lower interest rates was to drive investment capital into equities, thereby inflating the value of equities relative to the value of goods and services, and increasing the wealth gap between the wealthy and working class.
In the Eurozone, studies have shown that QE successfully averted deflationary spirals in 2013–2014, and prevented the widening of bond yield spreads between member states.[101] QE also helped reduce bank lending cost.[102] However, the real effect of QE on GDP and inflation remained modest[103][104] and very heterogeneous depending on methodologies used in research studies, which find on GDP comprised between 0.2% and 1.5% and between 0.1 and 1.4% on inflation. Model-based studies tend to find a higher impact than empirical ones.[citation needed]
In Japan, focusing on equity purchases, studies have shown that QE successfully boosted stock prices,[105][91] but appear to have not been successful in stimulating corporate investment.[91]
Risks and side-effects
Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated and too much money is created by the purchase of liquid assets.[106] On the other hand, QE can fail to spur demand if banks remain reluctant to lend money to businesses and households. Even then, QE can still ease the process of deleveraging as it lowers yields. However, there is a time lag between monetary growth and inflation; inflationary pressures associated with money growth from QE could build before the central bank acts to counter them.[107] Inflationary risks are mitigated if the system's economy outgrows the pace of the increase of the money supply from the easing.[citation needed] If production in an economy increases because of the increased money supply, the value of a unit of currency may also increase, even though there is more currency available. For example, if a nation's economy were to spur a significant increase in output at a rate at least as high as the amount of debt monetized the inflationary pressures would be equalized. This can only happen if member banks actually lend the excess money out instead of hoarding the extra cash.[citation needed] During times of high economic output, the central bank always has the option of restoring reserves to higher levels through raising interest rates or other means, effectively reversing the easing steps taken.
Economists such as John Taylor[108] believe that quantitative easing creates unpredictability. Since the increase in bank reserves may not immediately increase the money supply if held as excess reserves, the increased reserves create the danger that inflation may eventually result when the reserves are loaned out.[109]
QE benefits debtors; since the interest rate has fallen, there is less money to be repaid. However, it directly harms creditors as they earn less money from lower interest rates. Devaluation of a currency also directly harms importers and consumers, as the cost of imported goods is inflated by the devaluation of the currency.[110]
Impact on savings and pensions
In the European Union, World Pensions Council (WPC)financial economists have also argued that artificially low government bondinterest rates induced by QE will have an adverse impact on the underfunding condition of pension funds, since "without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years".[111][112] In addition to this, low or negative interest rates create disincentives for saving.[113] In a way this is an intended effect, since QE is intended to spur consumer spending.
Effects on climate change
In Europe, central banks operating corporate quantitative easing (i.e., QE programmes that include corporate bonds) such as the European Central Bank or the Swiss National Bank, have been increasingly criticized by NGOs[114] for not taking into account the climate impact of the companies issuing the bonds.[115][116][117][118] In effect, Corporate QE programmes are perceived as indirect subsidy to polluting companies. The European Parliament has also joined the criticism by adopting several resolutions on the matter, and has repeatedly called on the ECB to reflect climate change considerations in its policies.[119][120]
Central banks have usually responded by arguing they had to follow the principle of "market neutrality"[121] and should therefore refrain from making discretionary choices when selecting bonds on the market. The notion that central banks can be market neutral is contested, as central banks always make choices that are not neutral for financial markets when implementing monetary policy.[122] Furthermore, research has demonstrated that, in the case of the ECB's corporate bond purchase programme, the principle of market neutrality is not a practical reality, as the ECB's purchases are concentrated on economic sectors that are not representative of the wider economy, and tend to be skewed towards carbon-intensive firms.[123]
Following this criticism, in 2020, several top level ECB policymaker such as Christine Lagarde,[124]Isabel Schnabel, Frank Elderson[125] and others have pointed out the contradiction in the market neutrality logic. In particular, Schnabel argued that "In the presence of market failures, market neutrality may not be the appropriate benchmark for a central bank when the market by itself is not achieving efficient outcomes"[126]
Since 2020, several central banks (including the ECB, Bank of England and the Swedish central banks) have announced their intention to incorporate climate criteria in their QE programmes.[127] The Network for Greening the Financial System has identified different possible measures to align central banks' collateral frameworks and QE with climate objectives.[128]
Increased income and wealth inequality
Critics frequently point to the redistributive effects of quantitative easing. For instance, British Prime Minister Theresa May openly criticized QE in July 2016 for its regressive effects: "Monetary policy – in the form of super-low interest rates and quantitative easing – has helped those on the property ladder at the expense of those who can't afford to own their own home."[129] Dhaval Joshi of BCA Research wrote that "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it".[130] Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality".[130]
Those criticisms are partly based on some evidence provided by central banks themselves. In 2012, a Bank of England report[131] showed that its quantitative easing policies had benefited mainly the wealthy, and that 40% of those gains went to the richest 5% of British households.[130][132]
Some of these policies may, on the one hand, increase inequality but, on the other hand, if we ask ourselves what the major source of inequality is, the answer would be unemployment. So, to the extent that these policies help – and they are helping on that front – then certainly an accommodative monetary policy is better in the present situation than a restrictive monetary policy.
In July 2018, the ECB published a study[135] showing that its QE programme increased the net wealth of the poorest fifth of the population by 2.5 percent, compared with just 1.0 percent for the richest fifth. The study's credibility was however contested.[136][137]
International spillovers for BRICs and emerging economies
Quantitative easing (QE) policies can have a profound effect on Forex rates, since it changes the supply of one currency compared to another. For instance, if both the US and Europe are using quantitative easing to the same degree then the currency pair of US/EUR may not fluctuate. However, if the US treasury uses QE to a higher degree, as evidenced in the increased purchase of securities during an economic crisis, but India does not, then the value of the USD will decrease relative to the Indian rupee. As a result, quantitative easing has the same effect as purchasing foreign currencies, effectively manipulating the value of one currency compared to another.[138][139]
BRIC countries have criticized the QE carried out by the central banks of developed nations. They share the argument that such actions amount to protectionism and competitive devaluation. As net exporters whose currencies are partially pegged to the dollar, they protest that QE causes inflation to rise in their countries and penalizes their industries.[140][141][142][143]
In a joint statement leaders of Russia, Brazil, India, China and South Africa, collectively BRICS, have condemned the policies of western economies saying "It is critical for advanced economies to adopt responsible macro-economic and financial policies, avoid creating excessive liquidity and undertake structural reforms to lift growth" as written in the Telegraph.[144]
According to Bloomberg reporter David Lynch, the new money from quantitative easing could be used by the banks to invest in emerging markets, commodity-based economies, commodities themselves, and non-local opportunities rather than to lend to local businesses that are having difficulty getting loans.[145]
Moral hazard
Another criticism prevalent in Europe,[146] is that QE creates moral hazard for governments. Central banks’ purchases of government securities artificially depress the cost of borrowing. Normally, governments issuing additional debt see their borrowing costs rise, which discourages them from overdoing it. In particular, market discipline in the form of higher interest rates will cause a government like Italy's, tempted to increase deficit spending, to think twice. Not so, however, when the central bank acts as bond buyer of last resort and is prepared to purchase government securities without limit. In such circumstances, market discipline will be incapacitated.
Reputational risks
Richard W. Fisher, president of the Federal Reserve Bank of Dallas, warned in 2010 that QE carries "the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields[113] at a time of persistent budget deficits, concern about debt monetization quickly arises." Later in the same speech, he stated that the Fed is monetizing the government debt: "The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation's central bank will be monetizing the federal debt."[147]
Ben Bernanke remarked in 2002 that the US government had a technology called the printing press (or, today, its electronic equivalent), so that if rates reached zero and deflation threatened, the government could always act to ensure deflation was prevented. He said, however, that the government would not print money and distribute it "willy nilly" but would rather focus its efforts in certain areas (e.g., buying federal agency debt securities and mortgage-backed securities).[148][149]
According to economist Robert McTeer, former president of the Federal Reserve Bank of Dallas, there is nothing wrong with printing money during a recession, and quantitative easing is different from traditional monetary policy "only in its magnitude and pre-announcement of amount and timing".[4][5]
In response to concerns that QE is failing to create sufficient demand, particularly in the Eurozone, some have called for "QE for the people" or "helicopter money". Instead of buying government bonds or other securities by creating bank reserves, as the Federal Reserve and Bank of England have done, some suggest that central banks could make payments directly to households (in a similar fashion as Milton Friedman's helicopter money).[150]
Economists Mark Blyth and Eric Lonergan argue in Foreign Affairs that this is the most effective solution for the Eurozone, particularly given the restrictions on fiscal policy.[151] They argue that based on the evidence from tax rebates in the United States, less than 5% of GDP transferred by the ECB to the household sector in the Eurozone would suffice to generate a recovery, a fraction of what it intends to be done under standard QE. Oxford economist John Muellbauer has suggested that this could be legally implemented using the electoral register.[152]
Carbon quantitative easing (CQE) is an untested form of QE that is featured in a newly proposed international climate policy, called a global carbon reward.[155][156][157] A major goal of CQE is to finance the global carbon reward by managing the exchange rate of a new representative currency, called a carbon currency. The carbon currency will act as an international unit of account and a store of value, because it will represent the mass of carbon that is mitigated and rewarded under the global carbon reward policy.
Fiscal policy
Keynesian economics became popular after the Great Depression. The idea is that in an economy with low inflation and high unemployment (especially technological unemployment), demand side economics will stimulate consumer spending, which increases business profits, which increases investment. Keynesians promote methods like public works, infrastructure redevelopment, and increases in the social safety net to increase demand and inflation.
Quantitative easing has been nicknamed "money printing" by some members of the media,[158][159][160] central bankers,[161] and financial analysts.[162][163]
However, QE is a very different form of money creation than it is commonly understood when talking about "money printing" (otherwise called monetary financing or debt monetization). Indeed, with QE the newly created money is usually used to buy financial assets beyond just government bonds[158] (corporate bonds etc.) and QE is usually implemented in the secondary market. In most developed nations (e.g., the United Kingdom, the United States, Japan, and the Eurozone), central banks are prohibited from buying government debt directly from the government and must instead buy it from the secondary market.[164][165] This two-step process, where the government sells bonds to private entities that in turn sell them to the central bank, has been called "monetizing the debt" by many analysts.[164]
The distinguishing characteristic between QE and debt monetization is that with the former, the central bank creates money to stimulate the economy, not to finance government spending (although an indirect effect of QE is to lower rates on sovereign bonds). Also, the central bank has the stated intention of reversing the QE when the economy has recovered (by selling the government bonds and other financial assets back into the market).[158] The only effective way to determine whether a central bank has monetized debt is to compare its performance relative to its stated objectives. Many central banks have adopted an inflation target. It is likely that a central bank is monetizing the debt if it continues to buy government debt when inflation is above target and if the government has problems with debt financing.[164]
Neo-Fisherism, based on theories made by Irving Fisher reasons that the solution to low inflation is not quantitative easing, but paradoxically to increase interest rates. This is due to the fact that if interest rates continue to decline, banks will lose customers and less money will be invested back into the economy.
In a situation of low inflation and high debt, customers will feel more secure holding on to cash or converting cash into commodities, which fails to stimulate economic growth. If the money supply increases from quantitative easing, customers will subsequently default in the face of higher prices, thus resetting the low inflation and worsening the low inflation issue.[168][169]
A central bank, reserve bank, national bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Many central banks also have supervisory or regulatory powers to ensure the stability of commercial banks in their jurisdiction, to prevent bank runs, and in some cases also to enforce policies on financial consumer protection and against bank fraud, money laundering, or terrorism financing.
The European Central Bank (ECB) is the prime component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important central banks.
In economics, the monetary base in a country is the total amount of money created by the central bank. This includes:
In macroeconomics, an open market operation (OMO) is an activity by a central bank to give liquidity in its currency to a bank or a group of banks. The central bank can either buy or sell government bonds in the open market or, in what is now mostly the preferred solution, enter into a repo or secured lending transaction with a commercial bank: the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral.
The Monetary Policy Committee (MPC) is a committee of the Bank of England, which meets for three and a half days, eight times a year, to decide the official interest rate in the United Kingdom.
Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, money is created by both central banks and commercial banks. Money issued by central banks is termed reserve deposits and is only available for use by central bank accounts holders, which is generally large commercial banks and foreign central banks. Central banks can increase the quantity of reserve deposits directly, by engaging in open market operations or quantitative easing. However, the majority of the money supply used by the public for conducting transactions is created by the commercial banking system in the form of bank deposits. Bank loans issued by commercial banks expand the quantity of bank deposits.
Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to private investors or raising taxes. The central banks who buy government debt, are essentially creating new money in the process to do so. This practice is often informally and pejoratively called printing money or money creation. It is prohibited in many countries, because it is considered dangerous due to the risk of creating runaway inflation.
Helicopter money is a proposed unconventional monetary policy, sometimes suggested as an alternative to quantitative easing (QE) when the economy is in a liquidity trap. Although the original idea of helicopter money describes central banks making payments directly to individuals, economists have used the term "helicopter money" to refer to a wide range of different policy ideas, including the "permanent" monetization of budget deficits – with the additional element of attempting to shock beliefs about future inflation or nominal GDP growth, in order to change expectations. A second set of policies, closer to the original description of helicopter money, and more innovative in the context of monetary history, involves the central bank making direct transfers to the private sector financed with base money, without the direct involvement of fiscal authorities. This has also been called a citizens' dividend or a distribution of future seigniorage.
The Bank of Canada is a Crown corporation and Canada's central bank. Chartered in 1934 under the Bank of Canada Act, it is responsible for formulating Canada's monetary policy, and for the promotion of a safe and sound financial system within Canada. The Bank of Canada is the sole issuing authority of Canadian banknotes, provides banking services and money management for the government, and loans money to Canadian financial institutions. The contract to produce the banknotes has been held by the Canadian Bank Note Company since 1935.
Modern monetary theory or modern money theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. According to MMT, governments do not need to worry about accumulating debt since they can create new money by using fiscal policy in order to pay interest. MMT argues that the primary risk once the economy reaches full employment is inflation, which acts as the only constraint on spending. MMT also argues that inflation can be addressed by increasing taxes on everyone to reduce the spending capacity of the private sector.
This is a list of historical rate actions by the United States Federal Open Market Committee (FOMC). The FOMC controls the supply of credit to banks and the sale of treasury securities. The Federal Open Market Committee meets every two months during the fiscal year. At scheduled meetings, the FOMC meets and makes any changes it sees as necessary, notably to the federal funds rate and the discount rate. The committee may also take actions with a less firm target, such as an increasing liquidity by the sale of a set amount of Treasury bonds, or affecting the price of currencies both foreign and domestic by selling dollar reserves. Jerome Powell is the current chairperson of the Federal Reserve and the FOMC.
The U.S. central banking system, the Federal Reserve, in partnership with central banks around the world, took several steps to address the subprime mortgage crisis. Federal Reserve Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve’s response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy." A 2011 study by the Government Accountability Office found that "on numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008."
In economics, stimulus refers to attempts to use monetary policy or fiscal policy to stimulate the economy. Stimulus can also refer to monetary policies such as lowering interest rates and quantitative easing.
Outright Monetary Transactions (OMT) is a program of the European Central Bank under which the bank makes purchases in secondary, sovereign bond markets, under certain conditions, of bonds issued by Eurozone member-states. The program was presented by its supporters as a principal manifestation of Mario Draghi's commitment to do "whatever it takes" to preserve the euro.
The 1994 bond market crisis, or Great Bond Massacre, was a sudden drop in bond market prices across the developed world. It began in Japan and the United States (US), and spread through the rest of the world. After the recession of the early 1990s, historically low interest rates in many industrialized nations preceded an unexpectedly volatile year for bond investors, including those that held on to mortgage debts. Over 1994, a rise in rates, along with the relatively quick spread of bond market volatility across international borders, resulted in a mass sell-off of bonds and debt funds as yields rose beyond expectations. This was especially the case for instruments with comparatively longer maturities attached. Some financial observers argued that the plummet in bond prices was triggered by the Federal Reserve's decision to raise rates by 25 basis points in February, in a move to counter inflation. At about $1.5 trillion in lost market value across the globe, the crash has been described as the worst financial event for bond investors since 1927.
Quantitative tightening (QT) is a contractionary monetary policy tool applied by central banks to decrease the amount of liquidity or money supply in the economy. A central bank implements quantitative tightening by reducing the financial assets it holds on its balance sheet by selling them into the financial markets, which decreases asset prices and raises interest rates. QT is the reverse of quantitative easing, where the central bank prints money and uses it to buy assets in order to raise asset prices and stimulate the economy. QT is rarely used by central banks, and has only been employed after prolonged periods of Greenspan put-type stimulus, where the creation of too much central banking liquidity has led to a risk of uncontrolled inflation.
The corporate debt bubble is the large increase in corporate bonds, excluding that of financial institutions, following the financial crisis of 2007–08. Global corporate debt rose from 84% of gross world product in 2009 to 92% in 2019, or about $72 trillion. In the world's eight largest economies—the United States, China, Japan, the United Kingdom, France, Spain, Italy, and Germany—total corporate debt was about $51 trillion in 2019, compared to $34 trillion in 2009. Excluding debt held by financial institutions—which trade debt as mortgages, student loans, and other instruments—the debt owed by non-financial companies in early March 2020 was $13 trillion worldwide, of which about $9.6 trillion was in the U.S.
Carbon quantitative easing (CQE) is an unconventional monetary policy that is featured in a proposed international climate policy, called a global carbon reward. A major goal of CQE is to finance the global carbon reward by managing the exchange rate of a proposed representative currency, called a carbon currency. The carbon currency will be an international unit of account that will represent the mass of carbon that is effectively mitigated and then rewarded under the policy. The carbon currency will function primarily as a store of value and not as a medium of exchange.
In 2009–2010, due to substantial public and private sector debt, and "the intimate sovereign-bank linkages" the eurozone crisis impacted periphery countries. This resulted in significant financial sector instability in Europe; banks' solvency risks grew, which had direct implications for their funding liquidity. The European central bank (ECB), as the monetary union's central bank, responded to the sovereign debt crisis with a series of conventional and unconventional measures, including a decrease in the key policy interest rate, and three-year long-term refinancing operation (LTRO) liquidity injections in December 2011 and February 2012, and the announcement of the outright monetary transactions (OMT) program in the summer of 2012. The ECB acted as a de facto lender-of-last-resort (LOLR) to the euro area banking system, providing banks with cash flow in exchange for collateral, as well as a buyer of last resort (BOLR), purchasing eurozone sovereign bonds. However, the ECB's policies have been criticised for their economic repercussions as well as its political agenda.
Yield curve control (YCC) is a monetary policy action whereby a central bank purchases variable amounts of government bonds or other financial assets in order to target interest rates at a certain level. It generally means buying bonds at a slower rate than would occur under a Quantitative Easing policy. It affects long term interest rates, whereas QE is more impactful on shorter term interest rates. Where QE focuses on quantities of bonds, YCC is concerned with the price. It can be thought of as a more effective form of QE: In QE the central bank buys bonds, but does not have a target for what interest rate those purchases will bring. In YCC, the central bank intentionally buys enough bonds to reach a certain interest rate target.
↑ Michael Joyce, David Miles, Andrew Scott & Dimitri Vayanos, Quantitative Easing and Unconventional Monetary Policy – An Introduction, The Economic Journal, Vol. 122, No. 564 (November 2012), pp. F271-F288: "The most high-profile form of unconventional monetary policy has been Quantitative Easing (QE)."
↑ Ricardo Reis, "Funding Quantitative Easing to Target Inflation", in "Designing Resilient Monetary Policy Frameworks for the Future”, Proceedings of the Jackson Hole Economic Policy Symposium: Federal Reserve Bank of Kansas City, August 2016, pp. 423–478.
↑ Hoover Institution, Economics Working Paper 14110, "Exiting from Low Interest Rates to Normality: An Historical Perspective", November 2014 Retrieved 10 March 2015.
↑ Quantitative Easing explained(PDF). Bank of England. pp.7–9. ISBN1-85730-114-5. Archived from the original(PDF) on 30 October 2010. Retrieved 20 July 2010. (page 7) Bank buys assets from ... institutions ... credits the seller's bank account. So the seller has more money in their bank account, while their bank holds a corresponding claim against the Bank of England (known as reserves) ... (page 8) high-quality debt ... (page 9) ... such as shares or company bonds. That will push up the prices of those assets ...
↑ Gilchrist, Simon, and Egon Zakrajšek. "The Impact of the Federal Reserve's Large‐Scale Asset Purchase Programs on Corporate Credit Risk". Journal of Money, Credit and Banking 45.s2 (2013): 29–57.
↑ Gagnon, Joseph, et al. "Large-scale asset purchases by the Federal Reserve: did they work?" (2010).
↑ Cúrdia, Vasco, and Andrea Ferrero. "How stimulatory are large-scale asset purchases?" FRBSF Economic Letter 22 (2013): 1–5.
↑ Chen, Han, Vasco Cúrdia, and Andrea Ferrero. "The macroeconomic effects of large‐scale asset purchase programmes". The economic journal 122.564 (2012).
↑ Gagnon, Joseph, et al. "The financial market effects of the Federal Reserve's large-scale asset purchases". International Journal of Central Banking 7.1 (2011): 3–43.
↑ Dafermos, Yannis; Gabor, Daniela; Nikolaidi, Maria; Pawloff, Adam; Lerven, Frank van. "Decarbonising is easy". New Economics Foundation. Retrieved 28 November 2020.
↑ Stanley Fischer, Elga Bartsch, Jean Boivin, Stanley Fischer, Philipp Hildebrand (August 2019). "Dealing with the next downturn: From unconventional monetary policy to unprecedented policy coordination" (PDF). BlackRock Institute.
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