Quantitative easing (QE) is an unconventional monetary policy instrument through which a central bank purchases financial assets on a large scale, financing them by creating bank reserves. Purchases generally aim to lower longer-term borrowing costs, support aggregate demand, and bring inflation toward the central bank’s objective. QE became particularly important when short-term policy interest rates approached their effective lower bound, limiting the scope for conventional rate cuts. It changes both the size and composition of the central bank’s balance sheet. (bankofengland.co.uk)
Operations and monetary accounting
QE usually involves purchasing government bonds, although programmes may also include corporate debt or mortgage-backed securities. Purchases commonly occur in secondary financial markets, where existing securities are traded. Compared with routine open market operations used to implement short-term interest-rate policy, QE emphasizes large, sustained purchases intended to influence broader financial conditions. Programme design specifies eligible assets, purchase amounts, timing, and reinvestment arrangements. (bankofengland.co.uk)
When a central bank buys a security from a non-bank investor, it credits the reserve account of the investor’s bank, which credits the investor’s deposit account. The central bank acquires an asset and creates a corresponding reserve liability; the investor exchanges a security for deposit money. When the seller is a bank, the transaction instead exchanges one bank asset for another. No physical banknotes need be printed. (bankofengland.co.uk)
QE therefore increases the monetary base, but its relationship with the broader money supply and lending is not mechanical. Banks do not simply lend central-bank reserves to households, nor does an additional unit of reserves automatically generate a fixed multiple of loans. Lending also depends on profitability, credit demand, risk assessment, and bank capital. (bankofengland.co.uk)
Transmission channels
The portfolio-rebalancing channel operates when purchases reduce the supply of particular securities available to private investors. Investors may substitute other assets, raising their prices and lowering their yields. Removing long-duration securities can also reduce the compensation investors require for bearing interest-rate risk—the term premium—thereby lowering longer-term borrowing costs. These effects depend on how readily investors substitute between assets. (federalreserve.gov)
The signalling channel arises when purchases influence expectations about future policy rates. QE may reinforce forward guidance, indicating that monetary accommodation will persist. A market-functioning channel can become important during severe disruption: purchases may improve liquidity and reduce pressures arising from forced asset sales. Their impact can consequently differ between stressed and normally functioning markets. (bankofengland.co.uk)
Lower financing costs and higher asset values may encourage consumption and investment, supporting output and employment. International portfolio adjustments may also affect the exchange rate. These are transmission mechanisms rather than guaranteed outcomes: their strength varies with financial institutions, economic conditions, and expectations. (bankofengland.co.uk)
Historical development
The Bank of Japan implemented a policy explicitly called quantitative easing from March 2001 to March 2006. Its main operating target shifted from the overnight call rate to current-account balances held at the central bank. It supplied reserves substantially above required levels and increased purchases of long-term Japanese government bonds when necessary to meet the target. This reserve-targeting framework differed from later programmes organized principally around asset-purchase quantities. (boj.or.jp)
During the global financial crisis, the Federal Reserve announced purchases of agency debt and agency mortgage-backed securities on November 25, 2008. It added longer-term Treasury purchases in March 2009 and subsequently conducted further large-scale asset-purchase programmes. The Bank of England began QE in March 2009, purchasing £200 billion of assets by January 2010, overwhelmingly government securities. (federalreserve.gov)
The European Central Bank announced an expanded asset-purchase programme on January 22, 2015, adding public-sector bonds to existing private-sector purchases. Its public-sector purchase programme began on March 9, 2015. These measures sought to counter persistently low inflation and provide additional monetary accommodation. (ecb.europa.eu)
Evidence and limitations
Research generally finds that asset purchases can lower longer-term yields and ease financial conditions, but estimates of their effects on output and prices vary. Evaluation requires constructing a counterfactual economy without QE, while separating purchases from simultaneous rate changes, policy announcements, and fiscal policy. Anticipated purchases may affect markets before transactions occur, complicating measurement. (bankofengland.co.uk)
A Federal Reserve study, revised in August 2023, estimated that a $500 billion asset-purchase shock raised output by approximately 1.2 percent and reduced unemployment by 0.5 percentage points at peak effect. Such estimates are model-dependent findings, not a universal conversion between purchase volumes and economic outcomes. (federalreserve.gov)
Distributional effects are also heterogeneous. Asset-price increases benefit asset holders, while changes in employment and earnings affect household incomes. A Bank of England study of UK monetary easing between 2008 and 2014 found a small marginal contribution to measured income inequality and wealth inequality; this result covers the combined policy response rather than QE alone. (bankofengland.co.uk)
Balance-sheet risks and withdrawal
QE exposes central banks to financial risks. Long-term assets may earn fixed returns while reserve liabilities pay rates that adjust with monetary policy. Rising policy rates can therefore reduce net income or generate losses; falling bond prices can also produce valuation or realized losses. These accounting outcomes differ from assessments of QE’s macroeconomic effectiveness. (bis.org)
Quantitative tightening reduces asset holdings through non-reinvestment of maturing securities or outright sales. Ending net purchases does not itself shrink the portfolio if proceeds continue to be reinvested. Withdrawal affects the supply of securities and reserves, but need not mirror QE’s effects exactly, particularly when market conditions differ between expansion and contraction. (federalreserve.gov)