Wednesday, April 15, 2020

What is quantitative easing anyway?

We are told that the Bank of Canada (BoC) is currently pursuing a policy of quantitative easing during the financial crisis brought on by the coronavirus pandemic. Some people seem to be in favour of this; others, less enthusiastic, have described it as "a vast experiment in printing money that has never been attempted before in this country".
It's a phrase you come across quite often in the financial parts (and even other parts) of the news, but, like me, you might only have a vague idea of what it actually means.
Without getting too far into the arcana if monetary policy, quantitative easing, also sometimes just called "asset buying", is a last resort method of stimulating the economy when more favoured measures like reducing interest rates are not available or not working. Right now, interest rates are at rock botton levels and the economy is still in need of a boost, hence the resort to quantitative easing in Canada, the UK snd elsewhere.
What actually happens is that a country's central bank, in our case the BoC, buys up substantial amounts of government debt in the form of government bonds, paying for it by creating a whole lot of digital money (i.e. money in bank accounts, rather than physical banknotes). This "new" money is intended to boost spending and investment in the economy as a whole.
Quantitative easing has various pros and cons, and therefore its supporters and detractors. It can help bring a country's economy out of recession, lower the cost and improve access to government funds, and help ensure that inflation does not go too low. On the other hand, it may cause inflation to balloon if the amount of easing is over-estimated and too much money is created. Also, it can fail to stimulate the economy as desired if banks just hoard the new money and are reluctant to lend it out to businesses and households.
That's probably as much as I need to know. Does it make any more sense to you?

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