Monetary Policy: What´s Quantitative Easing?

Monetary Policy: What´s Quantitative Easing?

19/02/2014 | Lidia Gómez Martínez (Alumna UC)

What is Quantitative Easing or QE? It is an innovative monetary policy that consists of creating money. Central Banks buy assets from commercial banks in order to increase the money supply.

The objective of this policy is to stimulate the economy by injecting money through commercial banks. Central Banks give money to commercial banks and they provide loans, so the economy can continue to function. Another objective is keep low interest rates.

Quantitative Easing has advantages and disadvantages; many people ask if QE is necessary and if it will have any positive effects. Economists say it is necessary to avoid a recession because the Central Banks have no alternatives left. Although Central Banks create money, commercial banks aren´t lending this money, which means real money supply isn´t actually increasing. But without QE the money supply would be in a big decline, and that would cause a recession.

But it also has negative implications. In the long term, QE causes inflation (there is more money to buy the same number of things).

Jens Weidmann, Germany´s Central Bank president, says that QE is not the solution. He disagrees with these innovative measures of the Central Bank. Weismann thinks it is not necessary provide more easing because the ECB has just reduced interest rates and it has promised to give unlimited liquidity.

Another detractor of this policy is the journal Financial Times, which contends that QE has had many negative influences for the economy.

We can´t say if QE is a good or a bad measure yet because there are many different opinions. And there aren´t enough references to evaluate its effects, because only the U.S. Federal Reserve has used this policy on a large scale for an extended amount of time.

Nota: Este artículo ha sido elaborado por Lidia Gómez Martínez, alumna de la Universidad de Cantabria, como una de las actividades enmarcadas dentro del programa de capacitación lingüística, dando su permiso para la publicación del mismo en FxM.

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