Quantitative Easing

Printing money is the last refuge of failed economic empires and banana republics

QUANTITATIVE EASING is a monetary policy tool sometimes employed by central banks to stimulate the economy when conventional monetary policy becomes ineffective.

To stimulate the economy, the central bank normally carries out expansionary monetary policy by lowering short-term interest rates through the purchase of short-term government securities. However, when the short-term interest rate gets close to zero it becomes impossible to lower the short-term interest rate further and so this policy tool can no longer be used to stimulate the economy (the liquidity trap).

When faced with the liquidity trap, the central bank can shift the focus of monetary policy away from interest rates and towards increasing the supply of money (quantitative easing). To increase the money supply, the central bank buys government bonds and other financial assets with newly printed (or more correctly, electronically generated) money which will increase excess reserves in the banking system. The central bank hopes that banks will use these excess reserves to increase lending which will help to stimulate the economy.

When a government increases the money supply, this will lead to higher prices because there will be more money chasing the same amount of goods and services.  In other words, printing money (quantitative easing) causes inflation.

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