Quantitative Easing (QE): what it is – Dictionary of Economics

Definition of ‘QE’

Quantitative easing (QE) also known as quantitative easing (QE) — (in English quantitative easing, whose acronym is QE) is a public economic program or measure that consists of generating currency and putting it into circulation.

It is used by some central banks to increase the money supply, increasing the excess reserves of the banking system, and generally through the purchase of the central government’s own bonds to stabilize or increase their prices and with them reduce long-term interest rates. . This measure is applied when the most usual methods of controlling the money supply have not worked.

QE Objectives

This tool has two objectives:

– Lower interest rates. What is intended is that the profitability of the bonds goes down. As there is a greater demand for these, their price goes up and profitability, therefore, goes down.

– Creation of liquidity to facilitate credit to consumers and companies. Due to the massive purchase of state and company bonds, the latter, and in particular the banks, increase their liquidity reserves. The other effect that is being pursued is that the banks make this liquidity reach their clients in the form of credits at reduced rates, both to individuals and to companies.

QE risks?

It should be noted that the use of quantitative easing also has its risks, as it could cause an increase in inflation if, as experts point out, the amount of easing needed and the money created by the purchase of liquid assets are overestimated. . Furthermore, it may no longer be effective in stimulating demand if banks remain reluctant to lend money to businesses and households.

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Countries that have used QE

Quantitative easing was first used by the Bank of Japan to combat domestic deflation in the 2000s. For their part, the United States, the United Kingdom, and the Eurozone have used QE during the 2007 financial crisis until the date since, as experts point out, the program is suitable for economies where the bank interest rate, the discount rate and/or the interbank interest rate are close to zero.

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