Quantitative Easing (QE). MarketCheese

Quantitative easing (QE) – is a specific measure taken by government to support a country’s domestic economy and increase its liquidity. As a form of monetary policy, quantitative easing helps to provide substantial inflows of money in the economy in order to artificially maintain all the economic processes (e.g., investing and lending) until they stabilize. Generally, it happens the following way: a country’s central bank buys out government and sometimes private securities (shares, bonds, and other financial instruments) from an open market, thereby providing the economy with money and lowering interest rates that can’t be decreased any other way. Typically, central banks have few options to maintain the economic situation, and quantitative easing is one of them. This method is spread worldwide, but its efficiency isn’t proved. In the US, it’s employed by the US Federal Reserve.

Quantitative easing takes place when the economy experiences the stagnation, or lack of progress. Interest rates usually are quite low during this time. For example, the QE program was introduced in the US during the pandemic of COVID-19.

Fiscal policy can be used in conjunction with monetary policy as an additional means of the economy’s support.

Effectiveness of Quantitative Easing (QE)

Despite the fact that quantitative easing is a method designed for supporting the economy, its positive or negative influence hasn’t been well-studied yet. There are some expert opinions both for and against the effectiveness of quantitative easing. Some specialists, proving the positive effect of the QE programs, consider that this monetary policy played a significant role during the US recovery from the global financial crisis of 2007-2008. However, nothing has solidly proved these points of view, therefore, it’s still just a hypothesis. The specialists with the opposite opinion frequently consider quantitative easing as the way of “printing money”, which instead of supporting the economy might lead it to hyperinflation.

Also, there is an assumption about the quantitative easing effectiveness against an economic recession and deflation. However, this hypothesis has no solid evidence as well. Basically, QE has proved its usefulness in increasing the money inflows in the economy and lowering interest rates. Other assumptions about its influence on the economy hasn’t been proved yet.

When it comes to people and their financial strategies, quantitative easing is always more advantageous for borrowers rather than savers. The same way, low interest rates are more beneficial for investors rather than people who stay away from investing.

Associated risks of Quantitative Easing (QE)

Besides the aforementioned disadvantages of quantitative easing, there are some more. These risks, or possible negative consequences of this form of monetary policy, are considered by a country’s government before introducing the program. Some of them are listed below:

Inflation. First and foremost, quantitative easing as a method of supplying the economy with money contains the risk of inflation. For this reason, central banks carefully monitor the economic situation after introducing the quantitative easing program. It has been calculated that the time gap between the introduction of this program and inflation usually lasts about a year or year and a half. Beside the risk of inflation, there is a high possibility of stagflation, which is characterized by both the increase in prices and the growth of unemployment rate.
Credit crisis. The other negative effect of quantitative easing is a possible crisis of credit system. Central banks can increase the amount of money in the economy and their liquidity as well, but they can’t force other banks to enhance their lending activities, which usually get stalled because of the banks’ fear of bankruptcy and shortage of money. Therefore, the credit crunch might occur.
Currency devaluation. Due to significant inflows of money, the currency of a country which introduced the quantitative easing program might devalue. On the one hand, this situation will be quite profitable for manufacturers working with exported goods, but on the other hand, it will cause damage to the country’s imports.

Examples of Quantitative Easing (QE)

Let’s pay attention to some real examples of implementing the quantitative easing programs in different countries:

The US introduced the program of QE in 2009-2014 in order to overcome the Great Recession of the late 2000s. The Fed balance sheet was enriched with bonds and other securities from the open market, thereby stimulating the country’s economy. However, this program had an unpredictable result – the US banks held a lot of accumulated money as excessive reserves.
The QE program was repeated in the US during the pandemic of COVID-19 in 2020, but it was closed in 2022 because of the growing possibility of inflation.
After the economic crisis of 1997 in Japan, the country introduced the QE program to fight the economic recession and encourage the economy. However, the program didn’t meet the expectations. The country’s gross domestic product has decreased significantly by almost $1 trillion.
The central bank of Switzerland began the QE program after the global financial crisis of 2007-2008, and eventually recorded a positive dynamic of the economic growth. However, it hasn’t been proved that this dynamic was a result of quantitative easing.

All these examples demonstrate contradictory results of the quantitative easing programs.