Quantitative easing (QE) is a macroeconomic intervention by central banks that involves purchasing long-term bonds to increase market liquidity and money supply when interest rates are at or near zero. This policy was first implemented in Japan during the late 1990s and has been used by the US following the 2008 financial crisis, yet it faces risks such as potential ineffectiveness, inflation, and challenges when unwinding the policy. Despite its intended aim to stimulate economic recovery, there are concerns regarding its overall efficacy and the lengthy duration of zero interest rate policies.

1. Quantitative Easing

2. Outlines
• Definition
• How does it work?
• Quantitative easing in practice
• Risks of quantitative easing

3. Definition
• Quantitative easing (QE) refers to
macroeconomic intervention that gives
magnified liquidity to the market through
central bank purchases of mid- to long-term
bonds such as national debt securities coupled
with increases in the money supply after
implementing “zero” interest rates or similar
policies.

4. Cont.
• An ideal way to realize QE policy would be
for the Fed to purchase bonds directly, so that
financial institutions might obtain a large
amount of short-term liquidity from the Fed
and then inject it into the real economy via
lending to promote economic recovery.

5. How does it work?
• When interest rates approach “zero” while the
economy remains in recession, conventional
monetary policies that focus on regulating
currency prices are rendered invalid.
Therefore, “zero interest rate” countries such
as Japan, America and the European countries
have to implement nonconventional QE
monetary policies.

6. Quantitative easing in practice
• QE monetary policy was first implemented in Japan.
In the late 1990s, after showing slight improvement
after years of recession, the Japanese economy was
devastated by the East Asian financial crisis as well
as by its domestic financial policies.
• In March 1998, the Bank of Japan announced the
implementation of a zero-interest-rate policy;
however, the effects were ineffective and not
significant enough to stop deflation.

7. Cont.
• Therefore, in March 2001, the Bank of Japan
announced its intent to implement QE.
• In late 2001, the Bank of Japan increased the range of
its operations by starting to purchase stock, and at the
end of July 2003, it widened the program even further
with the purchase of asset-backed commercial paper
and asset-backed securities.

8. Cont.
• US experienced the same scenario after 2008 crisis,
By the end of 2008, the interest rate was at its lowest
level in history, between 0.00 and 0.25 percent, and
this zero interest rate policy has continued up to the
present. The unemployment rate at that time was as
high as 7.4 percent and it kept increasing.

9. Cont.
• Even with a zero interest rate, the Fed was unable to
increase employment and control inflation with the
usual price-based monetary policy instruments, the
Fed had no choice but to turn to a nonconventional
quantity-based monetary policy, namely QE.
• On November 24, 2008, the Fed announced that it
would purchase USD 100 billion in bonds issued by
Freddie Mac, Fannie Mae and the Federal Home
Loan Bank, as well as USD 500 billion in asset-
backed securities.

10. Risks of quantitative easing
• The first risk is that QE may not work as, many have
argued, was the case in Japan.
• There is the chance that QE might spur inflation.
• There are the risks associated with an exit from
QE. Since the Fed has no experience
unwinding QE, it seems likely they will have a
difficult time judging when to exit and how to
exit.

11. References
• Yingxi Lu (2013). Quantitative Easing: Reflections
on Practice and Theory. World Review of Political
Economy, 4(3), 341-356.
• Paul Mortimer-Lee (2012).The effects and risks of
quantitative easing. Journal of Risk Management in
Financial Institutions, 5(4), 372–389.