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Quantitative Easing

The condition where the monetary policy is of extreme situation and which is used for stimulating such a kind of economy where the rate of interest are of zero level or is very close to the zero level, it is known as quantitative easing. Mostly it is seen that the central bank is the sole organization which works in an indirect manner to stimulate the economic system. The economic system is being stimulated by the central bank by reducing out the present rate of interest. But a situation arrives when the rate of interest cannot be further lowered by the central bank. So in those cases the central bank can work towards pitting down the whole system of finance by the use of original money through the system of quantitative easing.

Financial assets and mostly those financial assets that are short in term are purchased by the central bank in reality. The financial assets that are being purchased by the central bank comprises of bonds of the corporate sector and papers of the government. The financial assets are being purchased by the central bank from those institutions that deals with finance like the banks. It is through the appropriate use of money that the financial assets are being purchased by the central bank but it only leads to the creation of ex nihilo or out of nothing. These kinds of processes that take place in the market situation are better known as open market operations.

An interesting thing to note in this regard is that, when this new type of money is being created in the market it would only pit out the rise in the whole supply of money. This is actually done by the multiplication of that money that has been deposited. The multiplication of the deposited money can only be caused by encouraging such institutions to lend out and also cut down on the borrowing cost. In the long run, it would thus help in invigorating the money. In spite of this there remains a risk when banks might reject to lend out the money though the deposit has been increased to a large extent. There might also rise up a situation in which the policy may turn out to be very effective which would result to a very bad type of scenario leading to a situation of hyperinflation.

There are situations created when quantitative easing may also be explained as the mechanism of printing out money. But it is the central bank which is given the credentials for the creation of quantitative easing by the use of electronic procedures and through the use of ex nihilo situations. The condition of ex nihilo is being created by the central bank by an augmentation of the credit which is there in their bank account in the form of deposition. There are many countries where the policy of quantitative easing has been successfully used in their respective economic system. Quantitative easing is used in the economies of Japan during the early 2000s. Quantitative easing is also being used in the economies of such countries like the United Kingdom, United States of America when they were faced with the financial crisis of a global form between the years 2008-2009.

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