The concept behind Quantity Easing!
The term Quantitative Easing (QE) is being used for aggressive monetary measures undertaken by the Central Bank of the respective country. Those measures usually covered under the ambit of monetary policy and directly related to controlling supply of money, availability of money and cost of money or interest rates.During normal economic conditions, Central banks influence the economy by adjusting interest rates - When there's liquidity shortage, central banks decrease the interest rates to increase cash outflow in the system, similarly when there's excess liquidity Central banks increase the interest rates to attract more cash inflows.
During uncertain times, when the interest rates cannot be lowered any further (This is what happened during 2008-09’ crisis, after the US central bank Federal Reserve lowered the interest rates to near zero levels since Dec’08.) the central bank may attempts to provide the financial system with new money through Quantitative Easing...
The Process
With exclusive powers vetted by the government, the central bank turned on the printing presses on full throttle, to flood the market with enough cash or liquidity while trying to reboot the economic system under Quantity Easing process.
Theory and Practice
Theoretically, supporters believe that quantity easing process increases the quantity of money in the the system and central bank gets assets in exchange for the money.
Practically, the quantitative easing process focused on buying securities (like government or banking debt, mortgage-backed securities or even equities) from banks with money to ease pressure and giving extra dose of capital to the banking system.
Central Banks and Quantity Easing Process
The simple fact is that central bank can print new money to supply into the system or it doesn’t even need to turn on the printing press. Central bank can just increase the size of banks’ accounts in its balance sheet.
The accounts kept by banks with the central bank named as reserves, all banks have to hold mandatory reserves from their available funds at the central bank. So, during quantitative easing, central bank builds up excess reserves for banks.
When banks swap their illiquid securities for reserves, the size of their balance sheets shrink. Concerned to keep their own balance sheets static during economic pressures’ they usually start lending to end-borrowers and start putting more liquidity into the economy.
Take The Recent Example
The Federal Reserve' US Central bank, have been engaged in quantity easing to some extent from the end of CY (Calendar Year) 2008. The US Fed has publicly uncovered a range of planned initiatives for acquiring securities from the banking system, they might not call the term clearly but there have been a lot of buzz regarding Quantity Easing for Fed actions to contain the economic crisis.
Tags
Quantity Easing QE Money Supply Printing Balance Fed Interest Rates Economy Central Bank Liquidity Monetary Measures Securities Debt Economic System Quantitative Easing
