Quantitative Expansion (QE)

economic-dictionary

Quantitative easing or quantitative easing, better known as QE (from the English quantitative easing), eIt's an unconventional monetary policy tool. It consists of increasing the amount of money in circulation by buying assets in the market.

It is the central banks who fix the money supply in their economy through the purchase and sale of debt. In this case, to increase the monetary base, a central bank would buy assets in financial markets. Being the money you pay, the amount of new money in which the money supply increases. The opposite procedure would be followed to reduce the monetary base.

The higher the offer, the lower the prices. The same goes for money. As there is more money, its price decreases, that is, short-term interest rates fall.

Possible effects of quantitative easing

Increasing the money supply can lead to inflation if money growth is too fast. It has a very simple explanation, money has increased faster than the amount of goods that are available for sale. If the objective is not to create inflation, to avoid it a process known as monetary sterilization will be carried out.

Quantitative easing, as we mentioned, is an unconventional monetary policy, used when interest rates are already at a minimum (the price of money) and the central banks have few measures left to stimulate the economy. Buying assets in financial markets causes the central bank to considerably increase its balance sheet.

Many central banks have used quantitative easing during the 2008 crisis, such as the Federal Reserve, the European Central Bank, the Bank of England or the Bank of Japan. When they start to withdraw stimuli from the market, it is called tapering.

Quantity theory of money

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