Quantitative Easing

MoneyBestPal Team
A monetary policy tool used by central banks to stimulate the economy by increasing the money supply and lowering interest rates.
Image: Moneybestpal.com

Central banks utilize the monetary policy tool known as quantitative easing (QE) to boost the money supply and cut interest rates in order to support the economy. With the help of newly created funds, the central bank purchases from the market various securities, including bonds issued by the government. 

In order to promote lending and investment, it is important to raise the amount of credit and money available in the economy.

The fundamental workings of QE are as follows: the central bank buys assets from banks and other financial institutions, such as corporate bonds, mortgage-backed securities, or government bonds. The financial system receives a liquidity boost from these transactions, which lowers interest rates and expands the quantity of credit accessible. While increasing credit availability might serve to enhance economic activity, lower interest rates can encourage borrowing and investment.

When interest rates are already low and conventional monetary policy instruments like reducing interest rates are ineffective, such as during economic recessions or periods of low inflation, QE is generally utilized. The use of QE is debatable because it may result in inflation and a depreciation of the currency. Furthermore, it could be claimed that QE favors wealthy people and businesses who own financial assets disproportionately and may not actually boost the real economy.