QUANTITATIVE EASING

QUANTITATIVE EASING

central bank buys financial assets in exchange for money in order to increase lending and borrowing in the economy.​

How does QE lead to lower interest rates?

the central bank creates deposits on their balance sheet - they use these deposits to buy poor-performing financial assets and government bonds from firms. This increases bank liquidity so they can lend more and banks reduce interest rates to encourage borrowing.

How does QE improve the wealth effect?

Higher demand for bonds means people with bonds as assets will feel richer

How does QE remove deflationary expectations?

consumers and firms expect prices to start to rise - so will no longer put off purchases of goods and services.

The impact of QE on asset prices

QE increases the demand for bonds​
This pushes the price of the bonds up. ​
This reduces the yield on these bonds.

The impact of QE on the interest rates given on the new issues of bonds​

QE lowers the yield on current bonds.
​If the government wants to raise more funds, they will issue more government bonds.
​They can lower the interest rate they pay on these new bonds as the older bonds have a lower yield.

How is QE potentially inflationary?

through the growth in the money supply

How does QE create distortions in asset markets?

Artificially raising the price of assets could create a new bubble that will burst at some point leading to another recession.

How does QE cause wealth inequality?

Not everyone benefits from the increase in asset prices and some who benefit may live abroad or have a low MPC

How may QE not have much impact?

a result of imperfections in the banking system