Quantitative Easing: What You Need to Know
Quantitative easing (QE) is a monetary policy tool used by central banks to stimulate the economy. It involves buying government bonds or other assets from financial institutions in order to inject money into the system and increase liquidity.
During a recession, interest rates are often lowered as an attempt to encourage borrowing and spending. However, when interest rates approach zero, there may not be enough incentive for individuals and businesses to take out loans and invest in the economy. This is where QE comes in.
By purchasing government bonds, central banks can provide financial institutions with more cash reserves that can then be used for lending. In turn, this increased lending should stimulate economic growth and boost inflation levels.
While QE has been effective in stimulating economies during times of crisis, there are also potential drawbacks. One concern is that it could lead to inflation if too much new money is injected into the system without corresponding growth in output. Additionally, critics argue that QE primarily benefits large financial institutions rather than ordinary citizens.
Overall, quantitative easing remains a controversial but necessary tool for central banks during times of economic uncertainty.