Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy by increasing the money supply when standard policies are ineffective. It involves central banks buying assets like government bonds or other securities to inject money directly into the financial system. While QE aims to increase lending, spending, and job growth, it also poses risks like potentially fueling inflation and discouraging exports. As a result, QE is usually only used as a last resort to support the economy during severe downturns.

1. Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate
the economy when standard monetary policy has become ineffective
The central bank is an institution that manages a state’s (or several states’) currency, money supply,
and interest rates.
Basically, it describes a form of monetary policy used by central banks to increase the supply of
money in an economy when the control bank interest is close to 0.
How does it work:
- On one side businesses and consumers reduce their spending. On the other side, banks
don’t lend money because they are scared they will not get it back. Instead, they buy
treasuries because it is a safe way to make money, whereas consumers and businesses are
not.
- So the way for the central bank to get banks to lend money and make the economy works is
to put money inside directly. For that, the central bank buys assets banks have obtained..
- To buy those assets, the central bank has to create money electronically, this money will be
then transferred to the bank.
- Therefore, by buying those treasuries, the central bank increase their prices and lower their
yield (the income return on an investment), which lead the bank not to buy the bounds again,
because there is no money to make.
- In the end, it forces banks to find other investments by normal business loads. Thus, lower
yields reduce the cost of borrowing for businesses and households, making more likely to
spend.
- Bank can also buy directly assets of the companies. This should increases spending to help
keeping inflation around the governments’ 2% target.
-
QE1: December 2008 - June 2010
Purchased MBS that had been originated by Fannie Mae, Freddie Mac, or the Federal Home Loan
Banks.
• QE2:.November 2010 - June 2011
• $600 billion of Treasury securities. The Fed was actually hoping to spur inflation a bit by increasing
the money supply. Expectations of inflation increase demand, which would spur economic growth
QE achieved some of its goals:
It removed toxic subprime mortgages from banks. Balance sheets
It also helped to stabilize the U.S. economy, providing the funds and the confidence to pull out of the
recession.
It kept interest rates low enough to revive the housing market.
It did stimulate economic growth, although probably not as much as the Fed would have liked.

2. The impact and risk of Quantitative Easing
Quantitative easing can fuel economic growth since money funneled into the economy
should allow people to more comfortably make purchases. This can have a trickle down
effect on both the consumer and business communities, leading to increased stock market
performance and GDP growth.
1. Foster maximum employment: The experts argue that money printed through the QE
program can be used to help create new jobs for people since businesses should end up with
more cash on hand to finance new hiring.
2. Encourage lending: The general premise behind this claim is that central banks can reduce
long-term interest rates by buying treasuries. In providing financial institutions with more
cash, these institutions should be more willing to lend out money at lower rates. Such loans
then act to further stimulate the economy through higher consumer spending and business
development.
3. Encourage borrowing: Low interest rates tend to encourage increased borrowing. Although
this can help stimulate the economy, some argue it also has the tendency to encourage
customers and businesses to take on unnecessary debt. At the same time, some level of debt
and leverage is essential to the growth of any economy.
4. Increase spending. The theory is that as more money enters the economy, consumers will
have more to spend. This will in turn increase company profits and create more jobs, helping
stimulate the stock market. Ultimately, these factors should result in newfound consumer
confidence and an economic recovery.
5. Complement low interest rates. Another tool used to stimulate the economy is the federal
funds rate. By setting this rate low, the central bank can effectively encourage lending. As a
result, quantitative easing gave the central bank another monetary tool to stimulate the
economy through an increased money supply.
However, QE cannot simply generate wealth, and the drawbacks and potential risks of
even more QE will become greater the more money has been created already. Thereby, QE
has several drawbacks worth to consider.
1. It drives inflation much higher. This is the biggest concern around quantitative easing. As
more money circulates through the economy, prices rise. Why? While the supply of money
increases, the supply of goods remains the same. Thus, the competition for each good
increases, leading to increased prices, which in turn leads to inflation. Excessive inflation
leads to distortion of prices and incomes, and can cause an economy to operate inefficiently.
2. It creates dangers with international trade. Newly printed money can be used by the
government and consumers to import new goods and services from other countries. These
goods and services are more or less coming in for free. In other words, the value of the
importer’s currency decreases, which can discourage exporters.

3. 3. Threat to the money value. Many countries get frustrated with attempts at currency
manipulation like quantitative easing. They feel that these practices reflect an inability by the
country to generate real growth and to honor debts. For example, other countries have become
weary of lending the U.S. more money. Also, the status of the U.S. dollar as the world reserve
currency is in jeopardy, likely because of quantitative easing.
4. Benefits do not exist QE programs. When the central bank stops printing money, the
recovery often gets put on hold, or worse, begins to reverse. Although the hope is that new
consumer confidence will inspire a real recovery, many feel these programs are only a short-term
fix. This effect is exhibited by the fact that stock markets often fall when it is announced
or speculated that the quantitative easing program will be brought to an end.
5. Encourages debt. Another key worry about quantitative easing is that the increased money
supply and low interest rates encourage additional borrowing by both consumers and
businesses. While some debt can help stimulate an economy, wanton loans and excessive debt
can further exacerbate an already fragile one.
The important thing to remember is that quantitative easing generally leads to short-term
benefits with the risk of exacerbating long-term problems. As a result, it is often used as a
last resort when the economy faces a great risk of a recession or depression.