The term “Quantitative Easing” was first used in Japan in March, 2001 to fight deflation - reduction in price levels of services and goods - which has been a persistent feature of the Japanese economy for more than a decade now. QE has also been used by central banks in US, UK and the Euro zone, with multiple rounds of quantitative easing in USA being termed as QE1, QE2 and QE3.
Quantitative Easing comes into play in a scenario underscored by low interest rates, almost nearing zero, and lack of demand or a poor state of the economy in general. Deflation is also considered an important factor in such a situation. In an economy characterised by a general slowdown and low interest rates, further lowering of interest rates as a monetary policy tool to spur growth is not a possibility. Banks are unwilling to lend at low rates to the corporate sector and individuals when the GDP growth is sluggish or the economy is in a recessionary phase. Short-term bond buying by the government fails to
serve the purpose of bringing the economy back on track. The central bank then buys bonds and incurs long term debt. The Central bank thus injects liquidity into the system. The greater money supply is expected to boost demand because people and businesses get access to cheap credit and this eventually leads to growth in the economy.
In the post subprime crisis era, even though UK and EU have also used QE as a monetary policy tool, the maximum impact has been felt by Quantitative Easing undertaken by USA in multiple stages. This has increased its debt from $700-$800 billion to nearly $2 trillion. In the latest round of QE, termed QE3 or QE Infinity, undertaken from September 2012, the initial mandate was to purchase $40 billion of mortgage backed securities per month. This was hiked to $85 billion in December, 2012. In June 2013, the Federal Reserve Chairman, Ben Bernanke, hinted that USA was well on its path of achieving the set targets through QE and thus the monthly bond buying activity would see some tapering in the near term.
The speculation continues as US' jobs data improves.
Quantitative Easing comes into play in a scenario underscored by low interest rates, almost nearing zero, and lack of demand or a poor state of the economy in general. Deflation is also considered an important factor in such a situation. In an economy characterised by a general slowdown and low interest rates, further lowering of interest rates as a monetary policy tool to spur growth is not a possibility. Banks are unwilling to lend at low rates to the corporate sector and individuals when the GDP growth is sluggish or the economy is in a recessionary phase. Short-term bond buying by the government fails to
serve the purpose of bringing the economy back on track. The central bank then buys bonds and incurs long term debt. The Central bank thus injects liquidity into the system. The greater money supply is expected to boost demand because people and businesses get access to cheap credit and this eventually leads to growth in the economy.
In the post subprime crisis era, even though UK and EU have also used QE as a monetary policy tool, the maximum impact has been felt by Quantitative Easing undertaken by USA in multiple stages. This has increased its debt from $700-$800 billion to nearly $2 trillion. In the latest round of QE, termed QE3 or QE Infinity, undertaken from September 2012, the initial mandate was to purchase $40 billion of mortgage backed securities per month. This was hiked to $85 billion in December, 2012. In June 2013, the Federal Reserve Chairman, Ben Bernanke, hinted that USA was well on its path of achieving the set targets through QE and thus the monthly bond buying activity would see some tapering in the near term.
The speculation continues as US' jobs data improves.
