quantitative easing

DEFINITION: Quantitative easing (QE) is a monetarist doctrine which recommends fighting recessions by injecting money into the economy by means of central bank purchases of government bonds and other financial assets according to specific criteria, namely:

  • The purchases must involve riskier, longer-term bonds
  • They must involve a commitment to a predetermined time
  • The amounts involved must also be pre-determined
  • The amounts involved must be very substantial

USAGE: Monetarist policy in general involves buying financial assets from commercial banks and other financial institutions. The purpose of making such purchases is twofold: to increase the money in circulation and to lower the interest rate (by raising the price and lowering the yield of financial assets).

The goal of QE was to stimulate the economy without causing inflation to spike.

What makes QE distinct from traditional monetary intervention through ordinary open-market operations is the four controlling criteria listed above.

QE was originally used in 2008, when the standard instruments employed by proponents of ordinary monetarist policy had become ineffective due to very low interest rates.

QE has been criticized for putting most of the increase to the money supply into the pockets of the stock- and bond-holding class, thus worsening income inequality.

The possibility of a different form of QE has been discussed, which might be used in the future without producing this unwanted effect. Namely, checks could simply be sent directly to citizens.

This type of QE goes by the name “helicopter money,” after the tongue-in-cheek suggestion made by Milton Friedman that the Fed simply dump bags of currency out of a helicopter.