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Quantitative easing
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Quantitative easing
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Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds, company shares, or other financial assets in order to artificially stimulate economic activity.[1][2] The term was coined by economist Richard Werner. Quantitative easing is a novel form of monetary policy that came into wide application following the 2008 financial crisis.[3][4] It is used to attempt to mitigate an economic recession when inflation is very low or negative. Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.

Similar to conventional open-market operations used to implement monetary policy, a central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. However, in contrast to normal policy, quantitative easing usually involves the purchase of riskier or longer-term assets (rather than short-term government bonds) of predetermined amounts at a large scale, over a pre-committed period of time.[5][6]

Central banks usually resort to quantitative easing when interest rates approach zero. Very low interest rates induce a liquidity trap, a situation where people prefer to hold cash or very liquid assets, given the low returns on other financial assets. This makes it difficult for interest rates to go below zero; monetary authorities may then use quantitative easing to stimulate the economy rather than trying to lower the interest rate. Quantitative easing can help bring the economy out of recession[7] and help ensure that inflation does not fall below the central bank's inflation target.[8]

Quantitative easing has faced a range of criticisms. Economists argue that it can inflate asset bubbles, potentially worsening a recession rather than alleviating it.[9] Others highlight QE's mixed side effects and risks, it may overshoot its goal by countering deflation too aggressively and fueling long-term inflation, or fail to stimulate growth if banks remain reluctant to lend and borrowers hesitant to borrow. QE has also been criticized for raising financial asset prices, and thereby contributing to economic inequality.[10] Major central banks around the world have implemented quantitative easing following the 2008 global financial crisis and again in response to the COVID-19 pandemic.[11]

Process and benefits

[edit]
See also: Monetary policy

Standard central bank monetary policies are usually enacted by buying or selling government bonds on the open market to reach a desired target for the interbank interest rate. However, if a recession or depression continues even when a central bank has lowered interest rates targets to nearly zero, the central bank can no longer lower interest rates — a situation known as the liquidity trap. The central bank may then attempt to stimulate the economy by implementing quantitative easing, that is, by buying financial assets without reference to interest rates. This policy is sometimes described as a last resort to stimulate the economy.[12][13]

A central bank enacts quantitative easing by purchasing, regardless of interest rates, a predetermined quantity of bonds or other financial assets on financial markets from private financial institutions.[14][15] This action increases the excess reserves that banks hold. The goal of this policy is to ease financial conditions, increase market liquidity, and encourage private bank lending.

Quantitative easing affects the economy through several channels:[16]

Credit channel
By providing liquidity in the banking sector, QE makes it easier and cheaper for banks to extend loans to companies and households, thus stimulating credit growth. Additionally, if the central bank also purchases financial instruments that are riskier than government bonds (such as corporate bonds), it can also increase the price and lower the interest yield of these riskier assets.[17]
Portfolio rebalancing
By enacting QE, the central bank withdraws an important part of the safe assets from the market onto its own balance sheet, which may result in private investors turning to other financial securities. Because of the relative lack of government bonds, investors are forced to "rebalance their portfolios" into other assets. Additionally, if the central bank also purchases financial instruments that are riskier than government bonds, it can also lower the interest yield of those assets (as those assets are more scarce in the market, and thus their prices go up correspondingly).[18]
Exchange rate
Because it increases the money supply and lowers the yield of financial assets, QE tends to depreciate a country's exchange rates relative to other currencies, through the interest rate mechanism.[19] Lower interest rates lead to a capital outflow from a country, thereby reducing foreign demand for a country's money, leading to a weaker currency. This increases demand for exports, and directly benefits exporters and export industries in the country.[20]
Fiscal effect
By lowering yields on sovereign bonds, QE makes it cheaper for governments to borrow on financial markets, which may empower the government to provide fiscal stimulus to the economy. Quantitative easing can be viewed as a debt refinancing operation of the "consolidated government" (the government including the central bank), whereby the consolidated government, via the central bank, retires government debt securities and refinances them into central bank reserves.[21]
Boosting asset prices
When a central bank buys government bonds from a pension fund, the pension fund, rather than hold on to this money, might invest it in financial assets, such as shares, that gives it a higher return. And when demand for financial assets is high, the value of these assets increases. This makes businesses and households holding shares wealthier – making them more likely to spend more, boosting economic activity.[22]
Signalling effect
Some economists argue that QE's main impact is due to its effect on the psychology of the markets, by signaling that the central bank will take extraordinary measures to facilitate economic recovery. For instance, it has been observed that most of the effect of QE in the Eurozone on bond yields happened between the date of the announcement of QE and the actual start of the purchases by the ECB.[citation needed]

History

[edit]

The Bank of Japan introduced QE from March 19, 2001, until March 2006, after having introduced negative interest rates in 1999. Most western central banks adopted similar policies in the aftermath of the 2008 financial crisis.[23]

Precedents

[edit]

The US Federal Reserve belatedly implemented policies similar to the recent quantitative easing during the Great Depression of the 1930s.[24][25] Specifically, banks' excess reserves exceeded 6 percent in 1940, whereas they vanished during the entire postwar period until 2008.[26] Despite this fact, many commentators called the scope of the Federal Reserve quantitative easing program after the 2008 crisis "unprecedented".[27][28][29]

Japan (2001–2006)

[edit]

A policy termed "quantitative easing" (量的緩和, ryōteki kanwa, from 量的 "quantitative" + 緩和 "easing")[30] was first used by the Bank of Japan (BoJ) to fight domestic deflation in the early 2000s.[31][32] The BOJ had maintained short-term interest rates at close to zero since 1999. The Bank of Japan had for many years, and as late as February 2001, stated that "quantitative easing ... is not effective" and rejected its use for monetary policy.[33]

The Bank of Japan adopted quantitative easing on 19 March 2001.[34][35] Under quantitative easing, the BOJ flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves and therefore little risk of a liquidity shortage.[36] The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It later also bought asset-backed securities and equities and extended the terms of its commercial paper-purchasing operation.[37] The BOJ increased commercial bank current account balances from ¥5 trillion to ¥35 trillion (approximately US$300 billion) over a four-year period starting in March 2001. The BOJ also tripled the quantity of long-term Japan government bonds it could purchase on a monthly basis.[citation needed] However, the seven-fold increase notwithstanding, current account balances (essentially central bank reserves) being just one (usually relatively small) component of the liability side of a central bank's balance sheet (the main one being banknotes), the resulting peak increase in the BOJ's balance sheet was modest, compared to later actions by other central banks.[citation needed] The Bank of Japan phased out the QE policy in March 2006.[38]

After 2007

[edit]

Following the 2008 financial crisis, policies similar to those undertaken by Japan were used by the United States, the United Kingdom, and the Eurozone. Quantitative easing was used by these countries because their risk-free short-term nominal interest rates (termed the federal funds rate in the US, or the official bank rate in the UK) were either at or close to zero. According to Thomas Oatley, "QE has been the central pillar of post-crisis economic policy."[4]

During the peak of the 2008 financial crisis, the US Federal Reserve expanded its balance sheet dramatically by adding new assets and new liabilities without "sterilizing" these by corresponding subtractions. In the same period, the United Kingdom also used quantitative easing as an additional arm of its monetary policy to alleviate its financial crisis.[39][40][41]

United States

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Federal Reserve holdings of treasury notes (blue) and mortgage-backed securities (red)
  30 year mortgage average
  30 Year Treasury Bond
   10 Year Treasury Bond
   2 Year Treasury Bond
   3 month Treasury Bond
   Effective Federal Funds Rate
   CPI inflation year/year
  Recessions
(Percent change from a year earlier)
  M2 money supply
  CPI
  Core CPI

The U.S. Federal Reserve System held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession.

November 2008: QE1. In late November 2008, the Federal Reserve started buying $600 billion in mortgage-backed securities.[42] By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes; this amount reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June, holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to keep holdings at $2.054 trillion. To maintain that level, the Fed bought $30 billion in two- to ten-year Treasury notes every month.[43]

November 2010: QE2. In November 2010, the Fed announced a second round of quantitative easing, buying $600 billion of Treasury securities by the end of the second quarter of 2011.[44][45] The expression "QE2" became a ubiquitous nickname in 2010, used to refer to this second round of quantitative easing by US central banks.[46] Retrospectively, the round of quantitative easing preceding QE2 was called "QE1".[47][48]

September 2012: QE3. A third round of quantitative easing, "QE3", was announced on 13 September 2012. In an 11–1 vote, the Federal Reserve decided to launch a new $40 billion per month, open-ended bond purchasing program of agency mortgage-backed securities. Additionally, the Federal Open Market Committee (FOMC) announced that it would likely maintain the federal funds rate near zero "at least through 2015".[49][50] According to NASDAQ.com, this is effectively a stimulus program that allows the Federal Reserve to relieve $40 billion per month of commercial housing market debt risk.[51] Because of its open-ended nature, QE3 has earned the popular nickname of "QE-Infinity".[52][better source needed] On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.[53]

On 19 June 2013, Ben Bernanke announced a "tapering" of some of the Fed's QE policies contingent upon continued positive economic data. Specifically, he said that the Fed could scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting.[54][55] He also suggested that the bond-buying program could wrap up by mid-2014.[56] While Bernanke did not announce an interest rate hike, he suggested that if inflation followed a 2% target rate and unemployment decreased to 6.5%, the Fed would likely start raising rates. The stock markets dropped by approximately 4.3% over the three trading days following Bernanke's announcement, with the Dow Jones dropping 659 points between 19 and 24 June, closing at 14,660 at the end of the day on 24 June.[57] On 18 September 2013, the Fed decided to hold off on scaling back its bond-buying program,[58] and announced in December 2013 that it would begin to taper its purchases in January 2014.[59] Purchases were halted on 29 October 2014[60] after accumulating $4.5 trillion in assets.[61]

March 2020: QE4.

Further information: Economic impact of the COVID-19 pandemic
Increase in US Federal Reserve assets in response to COVID-19 pandemic[62]

The Federal Reserve began conducting its fourth quantitative easing operation since the 2008 financial crisis; on 15 March 2020, it announced approximately $700 billion in new quantitative easing via asset purchases to support US liquidity in response to the COVID-19 pandemic.[63] As of mid-summer 2022 this resulted in an additional $2 trillion in assets on the books of the Federal Reserve.[64]

United Kingdom

[edit]
Immediate and delayed effects of quantitative easing[65]

The Bank of England's QE programme commenced in March 2009, when it purchased around £165 billion in assets as of September 2009 and around £175 billion in assets by the end of October 2009.[66] Five further tranches of bond purchases between 2009 and November 2020 brought the peak QE total to £895 billion.[67]

The Bank imposed a number of constraints on the QE policy, namely, that it would not buy more than 70% of any issue of government debt; and that it would only buy traditional (non-index-linked) debt, with a maturity of more than three years.[68] Originally, the bonds eligible for purchase were limited to UK government debt, but this was later relaxed to include high quality commercial bonds.[69]

QE was primarily designed as an instrument of monetary policy. The mechanism required the Bank of England to purchase government bonds on the secondary market, financed by the creation of new central bank money. This would have the effect of increasing the asset prices of the bonds purchased, thereby lowering yields and dampening longer term interest rates and making it cheaper for businesses to raise capital.[70] The aim of the policy was initially to ease liquidity constraints in the sterling reserves system, but evolved into a wider policy to provide economic stimulus. Another side effect is that investors will switch to other investments, such as shares, boosting their price and thus encouraging consumption.[71] In 2012 the Bank estimated that quantitative easing had benefited households differentially according to the assets they hold; richer households have more assets.[72]

In February 2022 the Bank of England announced its intention to commence winding down the QE portfolio.[73] Initially this would be achieved by not replacing tranches of maturing bonds, and would later be accelerated through active bond sales.

In August 2022 the Bank of England reiterated its intention to accelerate the QE wind down through active bond sales. This policy was affirmed in an exchange of letters between the Bank of England and the UK Chancellor of the Exchequer in September 2022.[74] Between February 2022 and September 2022, a total of £37.1bn of government bonds matured, reducing the outstanding stock from £875.0bn at the end of 2021 to £837.9bn. In addition, a total of £1.1bn of corporate bonds matured, reducing the stock from £20.0bn to £18.9bn, with sales of the remaining stock planned to begin on 27 September.

On 28 September 2022 the Bank of England issued a Market Notice announcing its intention to "carry out purchases of long dated gilts in a temporary and targeted way".[75] This was in response to market conditions in which the sterling exchange rate and bond asset pricing were significantly disrupted following a UK government fiscal statement.[76] The Bank stated its announcement would apply to conventional gilts of residual maturity greater than 20 years in the secondary market. The existing constraints applicable to QE bond purchases would continue to apply. The funding of the purchases would be met from central bank reserves, but would be segregated in a different portfolio from existing asset purchases. The Bank also announced that its annual £80bn target to reduce the existing QE portfolio remained unchanged but, in the light of current market conditions, the beginning of gilt sale operations would be postponed to 31 October 2022.[77]

Eurozone

[edit]

The European Central Bank engaged in large-scale purchase of covered bonds in May 2009,[78] and purchased around €250 billion worth of sovereign bonds from targeted member states in 2010 and 2011 (the SMP Programme). However, until 2015 the ECB refused to openly admit they were doing quantitative easing.[citation needed]

In a dramatic change of policy, following the new Jackson Hole Consensus, on 22 January 2015 Mario Draghi, President of the European Central Bank, announced an "expanded asset purchase programme", where €60 billion per month of euro-area bonds from central governments, agencies and European institutions would be bought.[79]

Beginning in March 2015, the stimulus was planned to last until September 2016 at the earliest with a total QE of at least €1.1 trillion. Mario Draghi announced the programme would continue: "until we see a continued adjustment in the path of inflation", referring to the ECB's need to combat the growing threat of deflation across the eurozone in early 2015.[80][81]

In March 2016, the ECB increased its monthly bond purchases to €80 billion from €60 billion and started to include corporate bonds under the asset purchasing programme and announced new ultra-cheap four-year loans to banks. From November 2019, the ECB resumed buying up eurozone government bonds at a rate of €20 billion in an effort to encourage governments to borrow more and spend in domestic investment projects.[82] In March 2020, to help the economy absorb the shock of the COVID-19 crisis, the ECB announced a €750 billion Pandemic Emergency Purchase Programme (PEPP).[83] The aim of the stimulus package (PEPP) was to lower borrowing costs and increase lending in the euro area.[84]

Switzerland

[edit]

At the beginning of 2013, the Swiss National Bank had the largest balance sheet relative to the size of its economy. It was responsible for, at close to 100% of Switzerland's national output. A total of 12% of its reserves were in foreign equities. By contrast, the US Federal Reserve's holdings equalled about 20% of US GDP, while the European Central Bank's assets were worth 30% of GDP.[85]

The SNB's balance sheet has increased massively due to its QE programme, to the extent that in December 2020, the US treasury accused Switzerland of being a "currency manipulator". The US administration recommended that Switzerland increase the retirement age for Swiss workers to reduce saving assets by the Swiss Social Security administration, in order to boost domestic demand and reduce the necessity to maintain QE to stabilize the parity between the dollar and the Swiss franc.[86]

Sweden

[edit]

Sveriges Riksbank launched quantitative easing in February 2015, announcing government bond purchases of nearly US$1.2 billion.[87] The annualised inflation rate in January 2015 was -0.3%, and the bank implied that Sweden's economy could slide into deflation.[87]

Japan after 2007 and Abenomics

[edit]
See also: Abenomics

In early October 2010, the Bank of Japan (BOJ) announced that it would examine the purchase of ¥5 trillion (US$60 billion) in assets. This was an attempt to push down the value of the yen against the US dollar to stimulate the domestic economy by making Japanese exports cheaper; however, it was ineffective.[88]

On 4 August 2011 the BOJ announced a unilateral move to increase the commercial bank current account balance from ¥40 trillion (US$504 billion) to a total of ¥50 trillion (US$630 billion).[89][90] In October 2011, the bank expanded its asset purchase program by ¥5 trillion ($66bn) to a total of ¥55 trillion.[91]

On 4 April 2013, the Bank of Japan announced that it would expand its asset purchase program by ¥60 trillion to ¥70 trillion per year.[92] The bank hoped to banish deflation and achieve an inflation rate of 2% within two years. This would be achieved through a QE programme worth US$1.4 trillion, an amount so large it is expected to double the money supply.[93] This policy has been named Abenomics, a portmanteau of economic policies from Shinzō Abe, the former Prime Minister of Japan.

On 31 October 2014, the BOJ announced the expansion of its bond buying program, to purchase ¥80 trillion of bonds a year.[94]

In addition to purchases of bonds, Governor Masaaki Shirakawa also directed the BOJ to begin purchasing corporate shares as well as debt securities in October 2010. The BOJ came up with a policy to purchase index ETFs as part of the 2010 Comprehensive Monetary Easing program, which initially placed a cap of ¥450 billion shares with a termination in December 2011. However, later Governor Haruhiko Kuroda replaced the program with the Quantitative and Qualitative Monetary Easing policy which empowered the BOJ to buy ETFs with no cap or termination date, with an increased annual target of ¥1 trillion. The cap was raised multiple times to over ¥19 trillion by March 2018. And on March 16, 2020, following the COVID-19 pandemic, the BOJ doubled its annual ETF purchase target to ¥12 trillion.[95]

Effectiveness of QE

[edit]

The effectiveness of quantitative easing is the subject of an intense dispute among researchers as it is difficult to separate the effect of quantitative easing from other contemporaneous economic and policy measures, such as negative rates.

Former Federal Reserve Chairman Alan Greenspan calculated that as of July 2012, there was "very little impact on the economy".[96] Bank deposits in the Fed increased by nearly $4 trillion during QE1-3, closely tracking Fed bond purchases. A different assessment has been offered by Federal Reserve Governor Jeremy Stein, who has said that measures of quantitative easing such as large-scale asset purchases "have played a significant role in supporting economic activity".[97]

While the literature on the topic has grown over time, it has also been shown that central banks' own research on the effectiveness of quantitative easing tends to be optimistic in comparison to research by independent researchers,[98] which could indicate a conflict of interest or cognitive bias in central bank research.

Several studies published in the aftermath of the crisis found that quantitative easing in the US has effectively contributed to lower long term interest rates on a variety of securities as well as lower credit risk. This boosted GDP growth and modestly increased inflation.[99][100][101][102][103][104] A predictable but unintended consequence of the lower interest rates was to drive investment capital into equities, thereby inflating the value of equities relative to the value of goods and services, and increasing the wealth gap between the wealthy and working class.

In the Eurozone, studies have shown that QE successfully averted deflationary spirals in 2013–2014, and prevented the widening of bond yield spreads between member states.[105] QE also helped reduce bank lending cost.[106] However, the real effect of QE on GDP and inflation remained modest[107][108] and very heterogeneous depending on methodologies used in research studies, which find on GDP comprised between 0.2% and 1.5% and between 0.1 and 1.4% on inflation. Model-based studies tend to find a higher impact than empirical ones.[citation needed]

In Japan, focusing on equity purchases, studies have shown that QE successfully boosted stock prices,[109][95] but appear to have not been successful in stimulating corporate investment.[95]

Risks and side-effects

[edit]

Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated and too much money is created by the purchase of liquid assets.[110] On the other hand, QE can fail to spur demand if banks remain reluctant to lend money to businesses and households. Even then, QE can still ease the process of deleveraging as it lowers yields. However, there is a time lag between monetary growth and inflation; inflationary pressures associated with money growth from QE could build before the central bank acts to counter them.[111] Inflationary risks are mitigated if the system's economy outgrows the pace of the increase of the money supply from the easing.[citation needed] If production in an economy increases because of the increased money supply, the value of a unit of currency may also increase, even though there is more currency available. For example, if a nation's economy were to spur a significant increase in output at a rate at least as high as the amount of debt monetized the inflationary pressures would be equalized. This can only happen if member banks actually lend the excess money out instead of hoarding the extra cash.[citation needed] During times of high economic output, the central bank always has the option of restoring reserves to higher levels through raising interest rates or other means, effectively reversing the easing steps taken.

Economists such as John Taylor[112] believe that quantitative easing creates unpredictability. Since the increase in bank reserves may not immediately increase the money supply if held as excess reserves, the increased reserves create the danger that inflation may eventually result when the reserves are loaned out.[113]

QE benefits debtors; since the interest rate has fallen, there is less money to be repaid. However, it directly harms creditors as they earn less money from lower interest rates. Devaluation of a currency also directly harms importers and consumers, as the cost of imported goods is inflated by the devaluation of the currency.[114]

Impact on savings and pensions

[edit]

In the European Union, World Pensions Council (WPC) financial economists have also argued that artificially low government bond interest rates induced by QE will have an adverse impact on the underfunding condition of pension funds, since "without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years".[115][116] In addition to this, low or negative interest rates create disincentives for saving.[117] In a way this is an intended effect, since QE is intended to spur consumer spending.

Effects on climate change

[edit]

In Europe, central banks operating corporate quantitative easing (i.e., QE programmes that include corporate bonds) such as the European Central Bank or the Swiss National Bank, have been increasingly criticized by NGOs[118] for not taking into account the climate impact of the companies issuing the bonds.[119][120][121][122] In effect, Corporate QE programmes are perceived as indirect subsidy to polluting companies. The European Parliament has also joined the criticism by adopting several resolutions on the matter, and has repeatedly called on the ECB to reflect climate change considerations in its policies.[123][124]

Central banks have usually responded by arguing they had to follow the principle of "market neutrality"[125] and should therefore refrain from making discretionary choices when selecting bonds on the market. The notion that central banks can be market neutral is contested, as central banks always make choices that are not neutral for financial markets when implementing monetary policy.[126][why?] Furthermore, research has demonstrated that, in the case of the ECB's corporate bond purchase programme, the principle of market neutrality is not a practical reality, as the ECB's purchases are concentrated on economic sectors that are not representative of the wider economy, and tend to be skewed towards carbon-intensive firms.[127]

Following this criticism, in 2020, several top level ECB policymaker such as Christine Lagarde,[128] Isabel Schnabel, Frank Elderson[129] and others have pointed out the contradiction in the market neutrality logic. In particular, Schnabel argued that "In the presence of market failures, market neutrality may not be the appropriate benchmark for a central bank when the market by itself is not achieving efficient outcomes"[130]

Since 2020, several central banks (including the ECB, Bank of England and the Swedish central banks) have announced their intention to incorporate climate criteria in their QE programmes.[131] The Network for Greening the Financial System has identified different possible measures to align central banks' collateral frameworks and QE with climate objectives.[132]

Increased income and wealth inequality

[edit]

Critics frequently point to the redistributive effects of quantitative easing. For instance, British Prime Minister Theresa May openly criticized QE in July 2016 for its regressive effects: "Monetary policy – in the form of super-low interest rates and quantitative easing – has helped those on the property ladder at the expense of those who can't afford to own their own home."[133] Dhaval Joshi of BCA Research wrote that "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it".[134] Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality".[134]

Those criticisms are partly based on some evidence provided by central banks themselves. In 2012, a Bank of England report[135] showed that its quantitative easing policies had benefited mainly the wealthy, and that 40% of those gains went to the richest 5% of British households.[134][136]

In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done quite as much for working Americans.[137]

Answering similar criticisms expressed by MEP Molly Scott Cato, the President of the ECB Mario Draghi once declared:[138]

Some of these policies may, on the one hand, increase inequality but, on the other hand, if we ask ourselves what the major source of inequality is, the answer would be unemployment. So, to the extent that these policies help – and they are helping on that front – then certainly an accommodative monetary policy is better in the present situation than a restrictive monetary policy.

In July 2018, the ECB published a study[139] showing that its QE programme increased the net wealth of the poorest fifth of the population by 2.5 percent, compared with just 1.0 percent for the richest fifth. The study's credibility was however contested.[140][141]

International spillovers for BRICS and emerging economies

[edit]

Quantitative easing (QE) policies can have a profound effect on Forex rates, since it changes the supply of one currency compared to another. For instance, if both the US and Europe are using quantitative easing to the same degree then the currency pair of US/EUR may not fluctuate. However, if the US treasury uses QE to a higher degree, as evidenced in the increased purchase of securities during an economic crisis, but India does not, then the value of the USD will decrease relative to the Indian rupee. As a result, quantitative easing has the same effect as purchasing foreign currencies, effectively manipulating the value of one currency compared to another.[142][143]

In a 2012 joint statement, the leaders of Russia, Brazil, India, China and South Africa, collectively BRICS, condemned the policies of western economies saying "It is critical for advanced economies to adopt responsible macro-economic and financial policies, avoid creating excessive liquidity and undertake structural reforms to lift growth" as written in the Telegraph.[144] Additionally, the BRICS countries have criticized the QE carried out by the central banks of developed nations. They share the argument that such actions amount to protectionism and competitive devaluation. As net exporters whose currencies are partially pegged to the dollar, they protest that QE causes inflation to rise in their countries and penalizes their industries.[145][146][147][148]

According to Bloomberg reporter David Lynch, the new money from quantitative easing could be used by the banks to invest in emerging markets, commodity-based economies, commodities themselves, and non-local opportunities rather than to lend to local businesses that are having difficulty getting loans.[149]

Moral hazard

[edit]

Another criticism prevalent in Europe,[150] is that QE creates moral hazard for governments. Central banks’ purchases of government securities artificially depress the cost of borrowing. Normally, governments issuing additional debt see their borrowing costs rise, which discourages them from overdoing it. In particular, market discipline in the form of higher interest rates will cause a government like Italy's, tempted to increase deficit spending, to think twice. Not so, however, when the central bank acts as bond buyer of last resort and is prepared to purchase government securities without limit. In such circumstances, market discipline will be incapacitated.

Reputational risks

[edit]

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, warned in 2010 that QE carries "the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields[117] at a time of persistent budget deficits, concern about debt monetization quickly arises." Later in the same speech, he stated that the Fed is monetizing the government debt: "The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation's central bank will be monetizing the federal debt."[151]

Ben Bernanke remarked in 2002 that the US government had a technology called the printing press (or, today, its electronic equivalent), so that if rates reached zero and deflation threatened, the government could always act to ensure deflation was prevented. He said, however, that the government would not print money and distribute it "willy nilly" but would rather focus its efforts in certain areas (e.g., buying federal agency debt securities and mortgage-backed securities).[152][153]

According to economist Robert McTeer, former president of the Federal Reserve Bank of Dallas, there is nothing wrong with printing money during a recession, and quantitative easing is different from traditional monetary policy "only in its magnitude and pre-announcement of amount and timing".[5][6]

Effects on stock market prices

[edit]

The effects of quantitative easing on the stock market are always present. The stock market reacts to nearly all updates regarding the Federal Reserve's actions. It tends to experience an upswing following announcements of expansionary policies and a downturn following announcements of contractionary policies.[154] Although there is no certain outcome, available evidence points to a positive correlation between quantitative easing policies and upward trends in the stock market.[155] Some of the most significant increases in the U.S. stock market indices have coincided with the implementation of quantitative easing measures. The most recent example would be the Federal Reserve's policies during the COVID-19 pandemic. The urgent need to stimulate the economy required a large influx of new liquidity, which has been achieved by quantitative easing. This liquidity was lent by banks to enterprises, stimulating their expansion and inflating sales, which led investors to anticipate growth in company revenues, leading to increased stock purchases.[156]

Conversely, the post COVID-19 economy, which faced increased inflation due to excessive quantitative easing, has been addressed through quantitative tightening measures. During this period, stocks experienced a downward shift. Investors thus favor the idea of increasing asset values during initial inflationary periods. However, it's more probable that confidence grows due to the anticipation of a healthier economy following expansionary measures and decreases when opposite measures are put in place.[157]

Alternative policies

[edit]

QE for the people

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See also: Helicopter money

In response to concerns that QE is failing to create sufficient demand, particularly in the Eurozone, some have called for "QE for the people" or "helicopter money". Instead of buying government bonds or other securities by creating bank reserves, as the Federal Reserve and Bank of England have done, some suggest that central banks could make payments directly to households (in a similar fashion as Milton Friedman's helicopter money).[158]

Economists Mark Blyth and Eric Lonergan argue in Foreign Affairs that this is the most effective solution for the Eurozone, particularly given the restrictions on fiscal policy.[159] They argue that based on the evidence from tax rebates in the United States, less than 5% of GDP transferred by the ECB to the household sector in the Eurozone would suffice to generate a recovery, a fraction of what it intends to be done under standard QE. Oxford economist John Muellbauer has suggested that this could be legally implemented using the electoral register.[160]

On 27 March 2015, 19 economists including Steve Keen, Ann Pettifor, Robert Skidelsky, and Guy Standing have signed a letter to the Financial Times calling on the European Central Bank to adopt a more direct approach to its quantitative easing plan announced earlier in February.[161] In August 2019, prominent central bankers Stanley Fischer and Philip Hildebrand co-authored a paper published by BlackRock in which they propose a form of helicopter money.[162]

Carbon quantitative easing

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Carbon quantitative easing (CQE) is an internationally coordinated monetary policy that forms a key part of a proposed climate policy, called a global carbon reward or carbon reward.[163][164][165][166] CQE would be implemented by a central bank carbon-alliance, and it is designed to direct central banks to purchase a carbon-linked financial asset, also called a carbon reward (XCR), using new bank reserves. Central banks would buy the XCR when necessary to guarantee its price floor, and to ensure its attractiveness to private investors. Unlike conventional quantitative easing, CQE would be strategic and long-term, and it does not involve buying government or corporate bonds or any other asset besides the XCR. CQE is a crucial component of the carbon reward policy because it would attract private capital and would share the mitigation cost between private investors (private sector) and central banks (public sector). With CQE, the central bank alliance would essentially be acting as the 'buyers of last resort' in the XCR market. Potential benefits of the approach are reduced costs for governments, firms, and citizens, and enhanced cooperation[164].

Fiscal policy

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Keynesian economics became popular after the Great Depression. The idea is that in an economy with low inflation and high unemployment (especially technological unemployment), demand side economics will stimulate consumer spending, which increases business profits, which increases investment. Keynesians promote methods like public works, infrastructure redevelopment, and increases in the social safety net to increase demand and inflation.

Monetary financing

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Main article: Monetary financing

Quantitative easing has been nicknamed "money printing" by some members of the media,[167][168][169] central bankers,[170] and financial analysts.[171][172]

However, QE is a very different form of money creation than it is commonly understood when talking about "money printing" (otherwise called monetary financing or debt monetization). Indeed, with QE the newly created money is usually used to buy financial assets beyond just government bonds[167] (corporate bonds etc.) and QE is usually implemented in the secondary market. In most developed nations (e.g., the United Kingdom, the United States, Japan, and the Eurozone), central banks are prohibited from buying government debt directly from the government and must instead buy it from the secondary market.[173][174] This two-step process, where the government sells bonds to private entities that in turn sell them to the central bank, has been called "monetizing the debt" by many analysts.[173]

The distinguishing characteristic between QE and debt monetization is that with the former, the central bank creates money to stimulate the economy, not to finance government spending (although an indirect effect of QE is to lower rates on sovereign bonds). Also, the central bank has the stated intention of reversing the QE when the economy has recovered (by selling the government bonds and other financial assets back into the market).[167] The only effective way to determine whether a central bank has monetized debt is to compare its performance relative to its stated objectives. Many central banks have adopted an inflation target. It is likely that a central bank is monetizing the debt if it continues to buy government debt when inflation is above target and if the government has problems with debt financing.[173]

Some economists such as Adair Turner have argued that outright monetary financing would be more effective than QE.[175][176]

Neo-Fisherism

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Neo-Fisherism, based on theories made by Irving Fisher reasons that the solution to low inflation is not quantitative easing, but paradoxically to increase interest rates. This is due to the fact that if interest rates continue to decline, banks will lose customers and less money will be invested back into the economy.

In a situation of low inflation and high debt, customers will feel more secure holding on to cash or converting cash into commodities, which fails to stimulate economic growth. If the money supply increases from quantitative easing, customers will subsequently default in the face of higher prices, thus resetting the low inflation and worsening the low inflation issue.[177][178]

See also

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References

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Revisions and contributorsEdit on WikipediaRead on Wikipedia

Quantitative easing

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Quantitative easing (QE) is an unconventional whereby a expands its by purchasing substantial quantities of long-term government bonds, mortgage-backed securities, or other assets from financial institutions to inject into the , lower long-term rates, and support lending and when short-term rates approach zero. First implemented by the in 2001 to combat persistent and stagnation, QE was later adopted by the U.S. starting in November 2008 amid the global financial crisis, involving multiple rounds that expanded its holdings from under $1 trillion to over $4 trillion by 2014. The initiated its asset purchase program in 2015, while similar measures were employed globally during the to stabilize markets. The policy operates through channels including direct reduction in bond yields via portfolio rebalancing—where banks sell assets to the and reinvest in higher-yielding alternatives—signaling of sustained low rates, and enhanced bank to encourage extension, though indicates the yield compression effect was most pronounced, with U.S. QE1-3 estimated to lower 10-year yields by 50-100 basis points cumulatively. Studies suggest QE mitigated deeper recessions by supporting asset prices and , potentially boosting U.S. GDP by 1-3% over implementation periods, but transmission to broad-based real economic activity via increased lending remained limited, with benefits disproportionately accruing to asset holders through elevated stock and housing prices. Controversies surrounding QE include its potential to foster by bailing out risk-taking financial institutions, exacerbate wealth inequality by inflating asset values without commensurate wage growth, and complicate future policy normalization through bloated balance sheets that risk market disruptions during . While fears of immediate proved unfounded as were largely held idle, critics argue QE blurred lines between monetary and , enabling governments to finance deficits indirectly and distorting price signals in capital allocation. Academic analyses often find smaller macroeconomic impacts than assessments, highlighting challenges in isolating QE effects from concurrent fiscal stimuli and underscoring risks of dependency on such interventions for economic management.

Definition and Mechanism

Core Process of QE

Quantitative easing (QE) fundamentally involves a purchasing predetermined quantities of financial assets, such as government bonds or mortgage-backed securities, from counterparties including banks and primary dealers. These transactions are executed through operations or targeted auctions, where the central bank takes of the assets in exchange for crediting the sellers' reserve accounts with newly created electronic central bank . This process directly expands the central bank's , with assets increasing on one side and reserve liabilities on the other, thereby injecting into the . The operational steps typically commence with a policy announcement detailing the program's scope, eligible , purchase volumes, and duration—for example, the European Central Bank's Asset Purchase Programme (APP), initiated in October 2014, specified net purchases starting at €60 billion per month. Purchases are then conducted by the or its network (e.g., Eurosystem national central banks), often prorated across eligible securities to maintain market neutrality, with settlements occurring via electronic transfers that boost commercial banks' . Unlike conventional operations that sterilize effects, QE deliberately sustains the reserve expansion to influence longer-term interest rates and credit conditions. In practice, counterparties receive non-interest-bearing or low-yield reserves in lieu of higher-yielding assets, encouraging reinvestment in riskier or longer-duration securities to achieve portfolio rebalancing. This electronic avoids fiscal implications like direct financing but markedly increases the , as observed in implementations where reserve levels surged from pre-crisis norms near zero to trillions in major economies. The , for instance, explicitly describes crediting sellers' accounts to enhance liquidity for lending and operations, underscoring the mechanism's role in transmitting beyond short-term rates.

Distinctions from Conventional Monetary Policy and Asset Purchases

Conventional primarily involves central banks adjusting short-term interest rates, such as the in the United States, through routine open market operations that buy or sell short-term government securities to influence the supply of and achieve a target rate range. Purchases of short-term Treasury securities, such as T-bills, are typically conventional open market operations or reserve management tools rather than quantitative easing, which targets long-term assets to lower longer-term interest rates and expand the monetary base for stimulus purposes. These operations are typically conducted on a small scale, with the goal of fine-tuning to maintain and economic output without significantly altering the central bank's composition or size. In contrast, quantitative easing (QE) is deployed when short-term rates approach the , rendering further rate cuts ineffective, and instead entails large-scale purchases of longer-term assets like government bonds and mortgage-backed securities to directly lower long-term yields, inject into financial markets, and stimulate lending and . The scale of asset purchases distinguishes QE from conventional open market operations: while permanent open market operations in normal times might adjust reserves by tens of billions to manage short-term rate targets, QE programs, such as the 's QE1 in 2008-2010, involved purchases totaling over $1.7 trillion in securities, expanding the Fed's from under $1 trillion to more than $2.3 trillion by mid-2010. This expansion is deliberate and unsterilized, aiming to increase the and signal sustained accommodation, whereas conventional operations often offset purchases with sales or temporary repos to avoid persistent growth. QE also targets a broader range of assets, including private-sector securities like agency mortgage-backed securities during crises, to address specific market dysfunctions, unlike the short-term focus of standard operations. QE differs from non-QE asset purchases—such as those for provision or intervention—in intent and transmission: regular purchases, like temporary repo operations, are short-term and aimed at stabilizing markets without seeking to alter long-term borrowing costs or risk premia across . In QE, purchases reduce the supply of safe assets in circulation, compressing term premia and encouraging portfolio rebalancing toward riskier investments, effects not central to routine asset buys. Empirical analyses indicate QE's expansions have distinct spillover effects, such as greater impacts on international capital flows compared to equivalent conventional easing, due to the signaling of prolonged low rates and direct effects on long-duration bonds.

Theoretical and Conceptual Foundations

Economic Rationale at the Zero Lower Bound

The (ZLB) on nominal interest rates arises because economic agents can hold currency yielding zero nominal return, rendering negative policy rates infeasible without widespread adoption of alternatives like interest on reserves or negative-yielding deposits. When short-term rates approach this bound, conventional —primarily adjustments to the policy rate—loses traction, as further cuts cannot stimulate borrowing or spending amid expectations of low inflation or . This constraint risks trapping the economy in a , where increases in base money fail to boost due to hoarding of safe assets and pessimistic growth outlooks. Quantitative easing (QE) provides a rationale-grounded alternative by targeting the ZLB's limitations through central bank purchases of longer-maturity assets, such as government bonds and mortgage-backed securities, thereby injecting reserves and altering the relative supply of assets in private portfolios. The core economic logic posits that QE circumvents the ZLB by exerting downward pressure on long-term yields, which influence and consumption decisions more directly than short-term rates during normal conditions. This supply-side intervention reduces term premia and encourages investors to rebalance toward riskier assets, elevating asset prices and easing conditions to foster . From a theoretical standpoint, New Keynesian frameworks justify QE at the ZLB as a tool to mimic the effects of unattainable negative rates or extended forward guidance, potentially improving welfare by relaxing liquidity constraints and countering deflationary inertia. Models incorporating frictions like financial intermediation show QE enhancing bank lending capacity and reducing borrowing spreads, thereby amplifying transmission to real output when fiscal multipliers are subdued. Proponents, including former Chair , argued this approach draws from historical analyses, enabling to support recovery without relying solely on fiscal expansion. However, the rationale assumes effective pass-through to private spending, which depends on credible commitment to sustained easing and absence of dominant safe-haven demands.

Key Transmission Mechanisms and Channels

Quantitative easing (QE) primarily transmits monetary stimulus to the broader economy by altering financial conditions beyond short-term interest rates, with key channels including portfolio rebalancing, signaling effects on expectations, and impacts on banking sector . The portfolio balance channel operates as the purchases long-term securities, reducing their supply in private portfolios and prompting investors to reallocate toward riskier or alternative assets, thereby compressing term premiums and spreads. Empirical analysis of U.S. QE programs from 2008–2014 indicates this channel lowered 10-year yields by approximately 50–100 basis points through duration and local supply effects, with investors facing imperfect substitutability between assets. In the euro area, similar purchases under the ECB's asset purchase program from 2015 onward reduced sovereign bond yields via supply scarcity, though effects diminished as program scale increased. The signaling channel reinforces transmission by conveying central banks' commitment to prolonged accommodative , anchoring long-term rate expectations and influencing forecasts. During the Federal Reserve's QE2 announcement in November 2010, market-implied path for short-term rates shifted lower, contributing to a 20–30 decline in longer-term yields independent of portfolio effects. Studies of QE rounds from 2009–2012 confirm signaling amplified yield reductions by clarifying intentions amid the , though its potency relies on credible forward guidance. Bank lending and channels involve QE's injection of reserves, which expands bank balance sheets and potentially eases supply, but evidence reveals limited or countervailing effects. U.S. data from 2008–2017 show QE increased but correlated with a $140 billion annual reduction in new lending, as banks substituted reserves—yielding near-zero returns—for higher-yield loans amid regulatory constraints and low loan demand. In the , QE from 2009 did not significantly boost real economy lending after controlling for demand factors, with transmission muted by weak bank capital positions post-crisis. This suggests a "reverse" lending channel where ample reserves incentivize holding low-risk assets over extending . Additional channels include wealth effects from elevated asset prices stimulating consumption and , and enhancing net exports. Post-2008 U.S. QE episodes raised equity valuations, transmitting via channels to GDP rather than solely bond yields, with a 10% equity boost linked to 0.5–1% higher growth via household wealth. effects were evident in QE1 (2008–2010), depreciating the by 5–10% against major currencies, supporting U.S. exports amid global spillovers. Overall, transmission efficacy varies by program phase: acute crisis QE (e.g., 2008–2009) leveraged multiple channels for stabilization, while later rounds emphasized signaling and portfolio effects amid saturated .

Historical Development

Pre-2008 Precedents and Early Experiments

The Bank of Japan (BOJ) implemented the first major program of quantitative easing (QE) from March 2001 to March 2006, in response to persistent deflation and economic stagnation following the collapse of Japan's asset price bubble in the early 1990s. After lowering short-term interest rates to near zero in 1999, the BOJ shifted to a policy targeting the quantity of bank reserves, specifically committing to maintain current account balances (CABs) held by financial institutions at the central bank at elevated levels to inject liquidity and stimulate lending. This marked a departure from conventional interest rate targeting, focusing instead on expanding the monetary base through outright purchases of Japanese government bonds (JGBs) and other assets. Under the QE framework, the BOJ initially set a CAB target of approximately 5 trillion yen in March 2001, which it gradually expanded to a peak of 36 trillion yen by 2004 through repeated purchases of long-term JGBs, , and asset-backed securities. The policy aimed to lower long-term interest rates, encourage risk-taking by banks, and counteract deflationary expectations, with the BOJ announcing its CAB targets at Meetings and adjusting purchases accordingly—reaching around 17 to 22 trillion yen in JGB holdings by the program's later stages. This experiment was unprecedented in scale for a major economy at the time, as the BOJ's expanded significantly while short-term rates remained pinned near zero. Empirical analyses of Japan's QE indicate it increased and supported some growth in lending, particularly to firms, with panel regressions showing a positive statistical impact on credit extension during 2001–2006 compared to pre-QE periods. However, the policy did not fully reverse deflationary trends or achieve sustained economic recovery, as CABs declined toward the end of the period and broader transmission to real activity remained limited due to structural issues like zombie firms and weak demand. The BOJ terminated QE on March 9, 2006, reverting to interest rate targeting amid signs of mild recovery, though critics noted its role in prolonging low-growth equilibrium without addressing underlying fiscal and challenges. Prior to Japan's 2001 initiative, central banks occasionally employed similar injections during crises, such as sterilized lending operations, but these lacked the explicit quantity-targeting and expansion characteristic of modern QE. No other major pre-2008 experiments matched the BOJ's systematic approach, making Japan's policy the foundational precedent that informed later implementations by institutions like the U.S. .

Post-Global Financial Crisis Implementations (2008-2015)

The U.S. Federal Reserve initiated its first large-scale asset purchase program, known as QE1, on November 25, 2008, announcing purchases of up to $100 billion in agency debt obligations followed by expansions to $600 billion in mortgage-backed securities (MBS) and an additional $100 billion in agency debt, with total purchases reaching approximately $1.75 trillion by March 2010, including $300 billion in longer-term Treasury securities added in March 2009. In November 2010, the Fed launched QE2, committing to purchase $600 billion in longer-term Treasury securities at a pace of about $75 billion per month through June 2011 to further support economic recovery amid persistently low inflation and high unemployment. Following QE2, the Fed implemented Operation Twist in September 2011, selling $400 billion in short-term Treasuries to buy an equivalent amount of longer-term securities, aiming to extend the average maturity of its holdings without expanding the balance sheet, extended to $667 billion in June 2012. QE3 began in September 2012 with open-ended monthly purchases of $40 billion in agency MBS, increased to $85 billion per month (including $45 billion in Treasuries) in December 2012, conditioned on improvements in the labor market but not tied to a fixed end date, continuing until tapering commenced in October 2013 and concluding in October 2014, resulting in the Fed's expanding from about $900 billion pre-crisis to roughly $4.5 trillion. These programs primarily targeted longer-term securities to lower yields and stimulate credit flows, with the Fed citing evidence of reduced stress and support for household spending as rationales. The (BoE) commenced quantitative easing in March 2009, announcing an initial £75 billion in asset purchases financed by central bank reserves, primarily gilts, expanding to £200 billion by November 2009 amid recessionary pressures and near-zero interest rates. Further expansions occurred in October 2011 (£75 billion), July (£50 billion), and August 2013 (£25 billion in non-financial investment-grade debt), reaching a total of £375 billion by late , with purchases aimed at boosting and nominal spending, though the program paused new purchases after 2013 but maintained holdings through 2015. In contrast to the Federal Reserve's earlier and more aggressive implementation starting in 2008-2009 with multiple rounds, the (ECB) launched its Asset Purchase Programme in 2015, influenced by internal debates including German opposition to perceived debt monetization, and emphasized reducing sovereign yield spreads across the eurozone. The ECB pursued precursor programs to full-scale QE before 2015, including the Covered Bond Purchase Programme (CBPP1) launched in July 2009 for €60 billion in to support bank funding, followed by CBPP2 in November 2011 for another €40 billion, and the Securities Markets Programme (SMP) in May 2010 involving €211 billion in sovereign bond purchases from , , , , and , though sterilized to avoid expansion. These measures, alongside longer-term refinancing operations (LTROs) in late 2011 and early 2012 totaling over €1 trillion in liquidity provision, addressed strains but differed from unsterilized QE by not explicitly targeting supply growth or yield compression across maturities until the 2015 expanded program. The (BoJ), having implemented QE since 2001, intensified purchases post-2008 through comprehensive easing measures, including in October 2010 a program to buy ¥5 trillion in assets over six months, extended and expanded amid deflationary risks, culminating in April 2013's Quantitative and Qualitative Easing (QQE) targeting a 2% goal with indefinite ¥60-70 trillion annual purchases of government bonds and other assets, doubling the . By 2015, BoJ holdings exceeded ¥300 trillion, reflecting ongoing efforts to escape conditions persisting from the .

Responses to the COVID-19 Pandemic (2020-2022)

In response to the acute economic contraction triggered by and restrictions starting in March 2020, major central banks rapidly expanded quantitative easing operations to inject , stabilize financial markets, and accommodate surging fiscal deficits from stimulus programs. These measures built on prior QE experiences but were implemented at an unprecedented scale and speed, with purchases often extending to a broader range of assets including corporate to prevent market freezes. The Federal Reserve's , for instance, grew from $4.2 trillion at the end of February 2020 to approximately $7.4 trillion by the end of 2020, peaking near $9 trillion in 2022, representing an expansion of approximately $5 trillion during this period. The U.S. initiated its fourth round of QE (QE4) on March 15, , announcing purchases of at least $500 billion in securities and $200 billion in agency mortgage-backed securities, with commitments soon shifting to open-ended operations calibrated to economic conditions rather than fixed amounts. This expansion absorbed a substantial share of issuance, with the Fed purchasing over 60% of net new long-term Treasuries in the second half of , effectively monetizing federal debt amid trillions in pandemic-related spending. Purchases continued through 2021 and into 2022, tapering only as pressures mounted, with the program aimed at lowering long-term yields and supporting credit flows to households and businesses. The launched the Pandemic Emergency Purchase Programme (PEPP) on March 18, 2020, with an initial €750 billion envelope for public and securities, expanded to €1.85 trillion by December 10, 2020, to provide "whatever it takes" flexibility in countering the pandemic shock. Unlike prior programs, PEPP waived eligibility constraints for certain countries like , enabling purchases proportional to capital keys but with deviations for parity, and included corporate sector bonds to ease funding stresses. Net purchases under PEPP halted in July 2022 after reaching the envelope, though reinvestments of maturing principal continued until at least the end of 2024. The responded on March 19, 2020, by cutting to 0.1% and augmenting its QE program with an additional £200 billion in asset purchases, raising the stock of holdings from £445 billion to £645 billion, focused primarily on gilts to anchor medium-term inflation expectations. Further increases followed, with the target reaching £895 billion by November 2020, incorporating corporate bond purchases to support business credit amid lockdowns. This expansion facilitated low borrowing costs for the government's £300 billion-plus fiscal package in 2020. Globally, other s mirrored these actions; the maintained its while expanding ETF and J-REIT purchases, and emerging market central banks like those in and initiated or scaled QE-like bond buying to counter capital outflows and currency depreciations. By mid-2022, aggregate advanced economy central bank assets had surged by over $10 trillion since pre-pandemic levels, underscoring QE's role in bridging liquidity gaps but also amplifying interdependence with sovereign fiscal policies.

Quantitative Tightening and Recent Easing Cycles (2022-2025)

The Federal Reserve initiated quantitative tightening (QT) on June 1, 2022, following an announcement on May 4, 2022, by allowing up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities (MBS) to roll off its balance sheet each month without reinvestment, aiming to normalize monetary policy amid elevated post-pandemic inflation. This process reduced the Fed's balance sheet from a peak of approximately $8.9 trillion in 2022 to about $6.6 trillion by October 2025, representing a contraction of roughly $2.3 trillion. To mitigate potential market disruptions, the Fed adjusted the pace of QT in subsequent years; for instance, in May 2024, it lowered the monthly runoff cap to $25 billion while maintaining MBS redemptions, and further reduced redemptions to $5 billion per month starting in April 2025. These measures reflected a cautious approach to draining excess while monitoring , which remained ample at around 10-11% of GDP, and the reverse (RRP) facility, which neared depletion by late 2025. By 2025, signals of tightening —such as modest upward pressures on short-term rates—prompted Chair to indicate that the QT process, ongoing since 2022, was approaching its end, potentially to be announced at the FOMC meeting to avoid financial "plumbing" issues. Parallel to QT, the Fed transitioned to monetary easing through reductions beginning in 2024, responding to a softening labor market and progress toward its 2% target, while maintaining that maximum remained intact. The , which had peaked at 5.25-5.50% in July 2023, was cut by 50 s in 2024 to 4.75-5.00%, followed by additional 25 reductions in November and December 2024, bringing it to around 4.25-4.50% by early 2025. Further cuts continued into 2025, including a 25 reduction in July 2025 to 4.00-4.25% and another in 2025, reflecting FOMC projections for gradual easing to balance risks of rises against inflationary pressures. Unlike prior cycles, this easing phase did not involve restarting quantitative easing or expansion, focusing instead on rate policy while QT runoff concluded, with analysts noting no immediate plans for new asset purchases absent a severe economic downturn.

Empirical Evidence on Effectiveness

Impacts on GDP Growth and Employment

Empirical studies on the effects of quantitative easing (QE) on GDP growth and yield mixed results, with estimates varying by , , and program round. Event-study approaches and vector autoregressions often attribute modest cumulative boosts to output from U.S. QE programs between 2008 and 2014, typically in the range of 1 to 3 percentage points over several years, though independent academic analyses frequently report smaller magnitudes than staff estimates. For instance, simulations based on QE's impact on long-term yields suggest it raised U.S. real GDP by approximately 1.2% cumulatively from 2009 to 2015, primarily through lower borrowing costs stimulating and consumption. The transmission to appears weaker and more delayed, with QE linked to in the U.S. rate of around 0.5 to 1 over multi-year horizons, often via a lending channel that eased constraints for firms. However, some models indicate an initial short-term rise in following QE announcements, peaking at 0.25 s before reversing, reflecting temporary disruptions in financial intermediation rather than sustained stimulus. Critics note that much of the liquidity injected remained as in the banking system, limiting pass-through to hiring and growth, with confounded by concurrent fiscal measures and natural recovery dynamics. In the , QE from 2015 onward is estimated to have added 0.3 percentage points to annual GDP growth through 2018, with effects concentrated in credit-dependent sectors, though gains were heterogeneous across member states. Aggregate unemployment reductions averaged less than 0.5 percentage points, per structural models, as transmission weakened in high-debt due to fiscal constraints and bank balance-sheet repair. Independent assessments highlight that evaluations often overestimate real-economy impacts relative to academic benchmarks, potentially due to optimistic assumptions about portfolio rebalancing and signaling channels. During the response, U.S. and global QE expansions correlated with sharper GDP rebounds post-2020 troughs, but econometric decompositions attribute only a fraction—around 0.5-1% of peak output effects—to monetary easing alone, with fiscal transfers dominating stabilization. Overall, while QE mitigated downside risks at the , its marginal contributions to sustained growth and job creation remain debated, with evidence suggesting in later rounds and limited absent complementary policies.

Effects on Inflation Dynamics

The implementation of quantitative easing (QE) by major central banks following the 2008 Global Financial Crisis did not result in sustained high inflation, despite significant expansions in central bank balance sheets and monetary bases. The U.S. Federal Reserve's QE programs from 2008 to 2014 increased its balance sheet from approximately $900 billion to $4.5 trillion, with the monetary base rising by over 400%. Yet, U.S. consumer price index (CPI) inflation averaged 1.7% annually from 2009 to 2015, remaining below the Fed's 2% target for much of the period. Similar patterns emerged in the Eurozone and Japan, where European Central Bank and Bank of Japan QE efforts also failed to generate appreciable inflationary pressures, with headline inflation often hovering near or below zero. This disconnect arose primarily from subdued money velocity, as commercial banks accumulated excess reserves—reaching $2.7 trillion in the U.S. by 2014—rather than extending credit aggressively, limiting the transmission of base money growth to broader aggregates like M2. Interest on excess reserves, introduced by the Fed in October 2008 at 0.25%, further incentivized reserve hoarding over lending, dampening the traditional money multiplier effect. Empirical analyses attribute this muted inflationary response to structural factors beyond mere expansion, including weak , by households and firms, and globalization's downward pressure on prices. Structural models, such as those estimating QE's impulse responses, indicate that while QE modestly boosted expectations—shifting the modal forecast by about 0.3 s during QE1—it did not translate into realized price increases due to impaired credit channels at the . A study using Swedish administrative data from 2015–2022 similarly found QE's inflationary effects to be statistically significant but quantitatively small, equivalent to a 0.1–0.2% rise in CPI per percentage point increase in the policy rate equivalent of QE. Critics of QE's benign post-2008 outcome argue that it masked underlying inflationary risks by inflating asset prices rather than consumer goods, though linking QE to broad-based remains limited in this era. In contrast, the aggressive QE response to the from 2020 to 2022 coincided with a sharp inflationary surge, though causality is multifaceted. The Fed's expanded from $4.2 in February 2020 to $8.9 by March 2022, fueling growth of over 40% in 2020 alone, while CPI peaked at 9.1% in June 2022—the highest since 1981. Event-study analyses of QE announcements during this period suggest it amplified more potently than conventional rate cuts, with a one-standard-deviation QE shock raising by up to 0.5 s over two years, potentially through enhanced portfolio rebalancing and fiscal-monetary coordination. However, econometric decompositions attribute the bulk of the 2021–2022 —estimated at 5–6 s—to supply disruptions, commodity shocks, and expansive , with QE's role confined to demand-side reinforcement rather than initiation. For instance, vector autoregressions controlling for these factors find QE's direct contribution to core PCE at around 1 . By 2023–2025, as commenced in June 2022—reducing the by over $1.5 — dynamics normalized, with CPI falling to 2.4% by mid-2025, underscoring QE's reversible but context-dependent influence. Overall, QE alters dynamics nonlinearly: at the with high uncertainty, its effects are attenuated by banking sector frictions and low velocity; in recovery phases with fiscal stimulus, it can accelerate price pressures via injection into channels. Cross-country evidence reinforces this, as Japan's prolonged QE since 2001 has yielded persistent deflationary tendencies despite tripling to 120% of GDP by 2020. These patterns challenge simplistic monetarist views equating base growth with , emphasizing instead the role of transmission mechanisms and economic slack in determining outcomes.

Influences on Long-Term Interest Rates and Yield Curves

Quantitative easing (QE) influences long-term interest rates primarily through the portfolio balance channel, whereby central bank purchases reduce the supply of long-term bonds available to private investors, thereby lowering their yields; the signaling channel, which anchors expectations of prolonged accommodative policy; and the scarcity value of safe assets, which elevates demand premia for government securities during crises. Empirical estimates indicate that the U.S. Federal Reserve's QE1 program, announced in November 2008 and involving purchases of up to $1.75 trillion in mortgage-backed securities, agency debt, and Treasuries through March 2010, reduced 10-year Treasury yields by approximately 100 basis points (bp), with effects concentrated in longer maturities due to targeted buying. Similarly, QE2, from November 2010 to June 2011 with $600 billion in Treasury purchases, lowered 10-year yields by 50-100 bp, driven by both signaling and portfolio rebalancing as investors shifted to riskier assets. QE3, initiated in September 2012 with open-ended monthly purchases tapering by 2014, exerted smaller incremental effects of around 20-40 bp on long-term yields, reflecting market anticipation and saturation in safe asset demand. During the response, the Fed's QE expansion from March 2020, scaling the balance sheet to nearly $9 trillion by mid-2022, compressed 10-year yields by an estimated 50-115 beyond what conventional alone would achieve, as modeled in frameworks accounting for duration risk reduction. Event-study analyses around announcement dates confirm these declines, with yield drops of 20-50 immediately following QE signals, though effects diminished over time as markets priced in forward guidance. For the (ECB), the Asset Purchase Programme launched in January 2015 and expanded through 2022 lowered 10-year sovereign yields in major euro area countries by about 59 per 10% of GDP in purchases, with stronger impacts on peripheral bonds due to reduced risk premia. implementations since 2013 similarly suppressed Japanese Government Bond yields, keeping 10-year rates below 0.1% for extended periods despite negative short-term rates. QE's effects on yield curves manifest as flattening, primarily via compression of term premia—the extra yield demanded for long-duration risk—rather than alterations in expected future short rates, as short-term rates were already constrained at the zero lower bound. U.S. evidence shows QE1 and QE2 steepened the front end slightly through signaling but flattened the overall curve by 50-100 bp at the long end, with the 10-30 year segment particularly affected due to purchase concentration. ECB studies using sectoral holdings data trace APP impacts to a parallel downward shift in the yield curve, reducing the slope by lowering long-term yields more than shorts, equivalent to a 20-40 bp term premium reduction across maturities. Quantitative tightening (QT) post-2017 and 2022 reversed these dynamics: the Fed's 2017-2019 QT raised 10-year yields by 20-50 bp, steepening the curve modestly, while 2022-2025 reductions in roll-offs contributed to yield increases amid rate hikes, underscoring QE's reversible but asymmetric influence on curve shape. These patterns hold across jurisdictions, though magnitudes vary with purchase scale and market liquidity, with peer-reviewed estimates consistently attributing 60-80% of long-rate declines to term premium effects rather than growth or inflation expectations.

Broader Economic Impacts

Stimulation of Credit and Financial Markets

Quantitative easing (QE) stimulates credit markets primarily through the portfolio balance and bank lending channels. In the portfolio balance channel, central bank purchases of government bonds and other securities reduce the supply of safe assets, prompting investors to rebalance toward riskier assets such as corporate bonds and equities, thereby lowering credit spreads and borrowing costs for non-financial firms. The bank lending channel operates by increasing bank reserves and elevating the value of banks' asset holdings, which bolsters capital positions and eases constraints on extending loans, particularly to credit-constrained borrowers. These mechanisms were evident in the U.S. Federal Reserve's large-scale asset purchases (LSAPs), where QE1 (November 2008–March 2010) involved $1.25 trillion in mortgage-backed securities (MBS), $175 billion in agency debt, and $300 billion in Treasuries, reducing 10-year Treasury yields by approximately 50–100 basis points and MBS spreads by 100–150 basis points relative to what they would have been absent intervention. Empirical studies confirm QE's role in expanding availability. The Federal Reserve's LSAPs during 2008–2014 increased bank liquidity creation by enhancing reserves and reducing funding costs, leading to higher volumes, especially for small businesses and riskier . Banks more exposed to QE-eligible securities relaxed lending standards, with effects comparable to a 1 cut in the , boosting loan growth by 1–2% in affected portfolios. In the euro area, ECB QE from 2015 onward similarly spurred bank supply, with exposed banks increasing lending to firms by up to 0.5% per of bond purchases, mitigating post-crisis . However, transmission was uneven; healthier banks amplified lending more than impaired ones, and effects were stronger for short-term than long-term. In financial markets, QE elevates asset prices by compressing risk premia and improving . U.S. QE programs raised equity valuations, with returns increasing 2–5% on announcement days for QE1, QE2, and QE3, driven by lower discount rates and heightened . This liquidity injection also extends to risk assets like cryptocurrencies, providing a tailwind by encouraging shifts toward higher-yield speculative investments and supporting bull market continuations, as evidenced by significant positive price responses in Bitcoin and Ethereum to QE announcements. liquidity improved, as measured by narrower bid-ask spreads and higher trading volumes in Treasuries and corporate , facilitating easier for issuers. During the response, the Fed's $3 trillion+ expansion in 2020 stabilized corporate markets, reducing high-yield spreads by over 200 basis points from March peaks and enabling $1.6 trillion in new issuance, though much of the stimulus flowed to investment-grade rather than junk-rated firms. These effects, while supportive of market functioning, have been critiqued for disproportionately benefiting asset owners over broad credit access, with analyses noting persistent gaps in lending to small firms despite overall expansion.

Spillover Effects on Emerging Economies and Currency Values

Quantitative easing (QE) implemented by major advanced economy central banks, such as the U.S. , generates spillover effects on economies (EMEs) primarily through portfolio rebalancing channels, where lower yields in advanced economies drive investors toward higher-return assets in EMEs, resulting in increased capital inflows, asset price , and currency appreciation. These inflows boost domestic output and equity markets in EMEs but heighten vulnerability to reversals, as evidenced by empirical studies showing QE episodes correlating with reduced EME bond yields by 50-100 basis points and equity index gains of 10-20% in recipient countries. During the post-2008 QE rounds, U.S. QE1 (November 2008 to March 2010) lowered EME sovereign yields and supported equity rallies, while QE2 (November 2010 to June 2011) amplified global equity spillovers, fostering pro-cyclical capital flows that appreciated EME currencies against the by an average of 5-10% in major recipients like and . However, the 2013 "taper tantrum"—triggered by Chair Ben Bernanke's May 22 announcement signaling reduced asset purchases—reversed these gains, causing sharp EME currency depreciations (e.g., fell 11% in May-June 2013), equity sell-offs, and bond yield spikes amid capital outflows exceeding $100 billion from EMEs in the second half of 2013. This episode underscored how EME vulnerabilities, including high foreign currency debt and low reserves, amplified taper-induced volatility, with countries like and experiencing GDP growth slowdowns of 1-2 percentage points in 2014. In the era, renewed QE by the from March onward initially prompted EME capital flight amid risk-off sentiment, depreciating currencies (e.g., dropped 30% against the in Q1 ), but subsequent QE expansions stabilized flows, reducing EME bond spreads by 100-200 basis points and supporting recoveries through lower global yields. Empirical analyses indicate that without advanced economy QE, EME volatility would have been 20-30% higher during -2021, though inflows disproportionately benefited larger EMEs with stronger fundamentals, exacerbating differentiation among smaller, more fragile . Overall, while QE spillovers provide short-term and growth impulses, they foster dependency on external financing, with appreciations during expansion phases often masking underlying current account deficits that precipitate crises upon policy normalization.

Consequences for Housing Markets and Real Estate Inflation

The Federal Reserve's quantitative easing programs, particularly those involving large-scale purchases of mortgage-backed securities (MBS), directly targeted the housing sector to lower long-term interest rates and support recovery following the 2008 financial crisis. Starting with QE1 in November 2008, the Fed announced plans to purchase up to $500 billion in agency MBS and $100 billion in agency debt, followed by expansions in QE2 and QE3 that included additional MBS acquisitions totaling over $1.7 trillion by 2014. These interventions reduced MBS yields and mortgage rates beyond what conventional policy changes would imply, with estimates indicating a decline of approximately 100 basis points in mortgage rates attributable to the initial MBS purchase announcements. Lower rates stimulated demand by making borrowing cheaper, contributing to a rebound in home sales and prices after the post-crisis trough. From to 2015, coinciding with peak QE implementation, the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose by about 25%, outpacing broader and wage growth during the period. Empirical analyses attribute part of this appreciation to QE's portfolio rebalancing channel, where investors shifted from bonds to assets, and a portfolio effect encouraging second-home purchases among wealthier households with bond holdings. In the Euro area, similar QE measures from 2015 onward correlated with price increases of 5-10% annually in major markets, though causality is confounded by other factors like credit availability. During the response QE in -2022, renewed MBS purchases exceeding $1 trillion further depressed mortgage rates to historic lows below 3% for 30-year fixed loans, fueling a surge in home prices amid supply constraints. U.S. home prices increased by over 40% from early to mid-2022, with studies linking monetary easing to heightened affordability pressures via the "pricing-out" effect, where elevated prices disproportionately impacted first-time buyers despite low rates. This real estate inflation persisted into 2023-2025, even as rates normalized, suggesting QE's legacy in embedding higher valuations detached from fundamentals like income growth. Critics contend that QE's emphasis on MBS exacerbated asset price distortions, potentially sowing seeds for real estate bubbles by channeling into illiquid markets and encouraging speculative over productive . While direct evidence of QE-induced bubbles remains debated—given 's post-2008 supply overhang and regulatory tightening—observational data show QE periods aligning with accelerated price-to-income ratios, reaching 5.5 nationally by 2022 from 3 pre-crisis averages. officials, including Chair Powell in 2025 remarks, acknowledged challenges in isolating MBS purchases' disproportionate impact on but noted their role in amplifying sectoral overheating relative to Treasury-focused QE.

Risks, Criticisms, and Controversies

Inflation Risks and Potential for Overheating

Quantitative easing (QE) expands balance sheets through large-scale asset purchases, injecting reserves into the banking system and potentially increasing supply, which poses risks of pressures if those reserves multiply into lending and spending. This mechanism can lead to overheating when exceeds supply capacity, manifesting as rising wage pressures, capacity utilization above normal levels, and accelerating price growth beyond targets. Empirical analyses indicate QE's inflationary transmission is amplified compared to conventional rate cuts, with effects materializing through portfolio rebalancing that boosts asset prices and , potentially spilling into consumer during economic recoveries. Post-2008 QE episodes in major economies demonstrated muted near-term goods despite massive interventions—the Federal Reserve's grew from $929 billion in August to $4.5 trillion by October 2014, yet core PCE averaged 1.4% annually from 2009 to 2019, attributed to low (averaging 1.4 in the ) and banks' retention of rather than lending. However, this period highlighted latent risks, as liquidity accumulated in financial markets fueled asset price (e.g., rose 300% from 2009-2019), creating vulnerabilities to overheating if transmission channels activated, such as through fiscal stimulus or supply normalization. Studies using structural models estimate QE's disinflationary signaling offset some pressures but warn of net inflationary bias in non-crisis settings, with potential output gaps closing faster than anticipated. The 2020-2022 response amplified these risks, with QE enabling unprecedented fiscal expansion; the Fed purchased $3 trillion in assets from March 2020 to June 2021, expanding its to $8.9 trillion by March 2022, coinciding with growth of 26% in 2020 and 12% in 2021, followed by CPI peaking at 9.1% in June 2022—the highest since 1981. ECB and QE similarly correlated with euro area HICP hitting 10.6% in October 2022, as pent-up demand and supply disruptions transmitted excess into prices, with econometric evidence linking QE shocks to 0.5-1% higher persistence. Critics, including IMF analyses, attribute part of the surge to QE's role in suppressing yields (10-year at 0.5% in August 2020), facilitating that overheated labor markets— unemployment fell to 3.5% by mid-2021 amid wage growth exceeding 5%—underscoring causal risks when QE extends beyond liquidity traps. Overheating potential intensifies in late-cycle expansions, where QE can distort price signals and encourage malinvestment, as seen in Swedish administrative data showing QE raising by 0.3-0.5% per of expansion through credit channels. Cross-country comparisons reveal higher risks in open economies, with QE spillovers exacerbating imported via currency depreciation (e.g., USD weakened 10% against major currencies in 2020-2021). While central banks initially downplayed these dynamics, citing anchored expectations, subsequent from 2022 confirmed QE's role in building inflationary momentum, with lags of 18-24 months observed in transmission models.

Moral Hazard, Asset Bubbles, and Financial Instability

Quantitative easing (QE) programs, by expanding balance sheets and flooding financial systems with , have raised concerns about , as institutions anticipate ongoing support for asset prices and reduced consequences for imprudent behavior. A study using bank-level data found that reserve accumulation from QE prompted U.S. banks to increase lending to riskier commercial borrowers, with the effect concentrated among banks with greater exposure to policy-induced . Similarly, analysis of QE1 (November 2008 to June 2010) and QE3 (September 2012 to October 2014) revealed that these policies elevated the share of high-risk loans in bank portfolios by encouraging substitution toward yield-seeking activities amid suppressed long-term rates. Critics, including (BIS) economists, argue this dynamic fosters and in credit allocation, as low funding costs distort incentives away from prudent underwriting. QE's downward pressure on yields has also been associated with asset price inflation detached from underlying economic fundamentals, potentially inflating bubbles. Empirical tests using advanced bubble detection methods, such as recursive right-tailed procedures, detected periods of exuberance in area stock markets coinciding with QE announcements from 2015 onward, with policy shocks explaining up to 20% of bubble episodes. In the U.S., QE rounds correlated with sharp equity rallies; for instance, the index surged approximately 60% during QE1 amid purchases totaling $1.75 trillion in assets by mid-2010, prompting debates over whether compressed risk premia fueled overvaluation. Cross-country evidence from QE implementations in advanced economies similarly identified statistically significant bubble formation in indices of nations like the U.S. and , attributing it to portfolio rebalancing into equities as bond returns diminished. While some analyses attribute gains to improved sentiment rather than pure , the BIS warns that prolonged accommodation inherently amplifies leverage and vulnerability buildup in non-bank sectors. These mechanisms contribute to broader financial instability risks, as QE-induced imbalances can amplify systemic fragilities during reversals. Administrative data from U.S. banks post-QE show that policy-driven inflows of uninsured deposits from non-banks heightened mismatch risks, increasing overall bank fragility by channeling funds into volatile wholesale markets. The has noted that QE elevates sensitivity of government borrowing costs to rate fluctuations and heightens market instability potential, as evidenced by the 2013 "taper tantrum" when mere hints of reduction triggered yield spikes and outflows. European Parliament briefing on extended QE highlighted dual threats: market distortions from search-for-yield behavior and macro imbalances like elevated corporate , which reached $10 globally by 2019 partly due to low-rate environments. NBER research underscores that while QE may pose lower stability risks than short-rate cuts in demand stimulation, its scale—such as the Federal Reserve's expansion to $8.9 by 2022—nonetheless sows seeds for shocks if exit policies falter.

Effects on Income and Wealth Distribution

Quantitative easing influences and distribution through several channels, including asset price appreciation, stimulation, and effects on savers' returns. The asset price channel, where QE elevates values of equities, bonds, and other securities, disproportionately benefits higher- households that hold a larger share of these assets, thereby widening wealth gaps. In contrast, gains from economic stimulus can temporarily boost labor for lower-income groups, while compressed rates reduce returns for savers, often middle-class households reliant on fixed-income investments. In the United States, empirical analysis of the Federal Reserve's QE programs from to 2013 indicates a net disequalizing effect on . Asset appreciation increased the 95/10 income ratio by 6.3 s, outweighing equalizing contributions from (reducing the ratio by 0.4 points) and . Overall, QE contributed to a 7.1 rise in the 95/10 ratio through these channels, modestly exacerbating income inequality despite broader recovery benefits. For , QE's boost to stock prices during QE1 (November –March 2010), QE2 (November 2010–June 2011), and QE3 (September 2012–October 2014) amplified disparities, as the top wealth decile's asset holdings captured most gains, with estimates attributing at least a 25% increase in inequality to QE effects. European studies present mixed results, reflecting variations in asset holdings and policy implementation. In the area, QE compressed income inequality slightly, lowering the for gross household income from 43.1 to 42.9 via reduced among lower-income groups, but had negligible effects on inequality due to balanced and distributions. However, across select eurozone countries like and , QE increased inequality measures such as the P90/P10 ratio through financial asset price surges, though price effects mitigated this in and the . analyses, while acknowledging these dynamics, often emphasize aggregate benefits over distributional costs, potentially understating long-term concentration driven by persistent asset .

Challenges to Central Bank Independence and Reputational Costs

Quantitative easing challenges independence by blurring the distinction between monetary and , as extensive purchases of government bonds facilitate deficit financing and risk fiscal dominance, where policy prioritizes debt sustainability over inflation control. High public debt levels amplify this vulnerability, pressuring to suppress yields through continued asset purchases to ease borrowing costs for governments. In the United States, pandemic-era QE by the monetized trillions in fiscal stimulus, expanding its to nearly $9 trillion by mid-2022 and drawing accusations of enabling unchecked government spending. The European Central Bank's QE programs, such as the Purchase Programme launched in , encountered direct legal assaults on independence; Germany's ruled in May 2020 that the ECB failed to demonstrate the program's proportionality, deeming it and ordering the Bundesbank to cease participation absent further ECB justification. Although the upheld the ECB's autonomy in December 2021, the ruling exposed fractures in supranational and fueled national debates over monetary orthodoxy. Reputational costs emerge from QE-induced balance sheet vulnerabilities, particularly unrealized losses when rates normalize. The Federal Reserve accrued operating losses exceeding $100 billion annually starting in 2023, culminating in negative equity of $1.2 trillion (about 4% of U.S. GDP) by late 2024 under fair value accounting, due to low-yield assets purchased during QE clashing with higher reserve remuneration. Similarly, the Swiss National Bank reported 2022 losses equivalent to 17% of Swiss GDP from its QE-era foreign reserves. These financial strains erode credibility, signaling risk mismanagement and constraining future policy flexibility amid political scrutiny. Political interference further compounds , as seen in public demands for accommodative policy to service ; U.S. President repeatedly assailed Fed Chair for rate decisions increasing Treasury yields, exemplifying how QE's legacy of market support invites expectations of perpetual intervention. Critics argue such episodes diminish central banks' perceived neutrality, fostering doubts about their resolve to prioritize mandates amid fiscal profligacy.

Fiscal-Monetary Interactions and Government Debt Sustainability

Quantitative easing facilitates fiscal-monetary coordination by enabling central banks to purchase large volumes of government bonds, thereby suppressing long-term interest rates and reducing the borrowing costs for fiscal authorities. During the U.S. 's QE programs from to 2014, its holdings of securities expanded from under $600 billion to approximately $2.5 trillion, acquiring about 19 percent of total federal debt held by the public by the conclusion of QE3 in 2014. This mechanism effectively recycled interest payments back to the via central bank remittances, lowering net debt service expenses and allowing greater fiscal flexibility without immediate market discipline. In periods of crisis, such as the , QE amplified fiscal stimulus by absorbing sovereign debt issuance, preventing yield spikes amid unprecedented deficits. The Fed's surged by over $4 trillion between March 2020 and mid-2022, with Treasury purchases directly supporting U.S. government borrowing that reached 15 percent of GDP in 2020. This interaction lowered the effective cost of public debt, as evidenced by sustained low yields despite debt-to-GDP ratios exceeding 120 percent by 2021, enabling sustained deficits without crowding out private in the short term. However, this entanglement raises concerns over sustainability, as reliance on purchases can foster fiscal dominance, where accommodates unsustainable fiscal paths to avert default risks. Empirical analyses indicate that QE reduces public debt burdens in liquidity traps by boosting output and , potentially stabilizing debt dynamics through higher nominal GDP growth. Yet, in non-crisis environments, prolonged QE may delay necessary fiscal adjustments, increasing vulnerability to normalization; for instance, quantitative tightening post-2022 has elevated debt servicing costs, with U.S. net interest payments projected to reach 3.5 percent of GDP by 2030 if rates remain elevated. Critics argue that QE borders on when purchases become quasi-permanent, eroding independence and heightening risks if fiscal profligacy persists. In consolidated government accounts, holdings of debt effectively cancel out, but unwinding these positions exposes fiscal fragility, as seen in potential losses from rising yields that could strain remittances or require taxpayer bailouts. Historical precedents, such as Japan's holding over 50 percent of JGBs amid a above 250 percent, illustrate how QE sustains high indebtedness at low rates but risks entrapment in low-growth equilibria if growth fails to outpace r-g differentials. While QE has empirically averted immediate crises without triggering in advanced economies, long-term sustainability hinges on credible fiscal anchors to prevent inflationary spirals or forced .

Alternative Policies and Debates

Fiscal Stimulus and Direct

Fiscal stimulus, encompassing increased and tax cuts, serves as a direct alternative to quantitative easing (QE) by injecting demand into the economy through fiscal channels rather than asset purchases. At the (ZLB), where nominal interest rates cannot fall further, empirical evidence indicates that fiscal multipliers—measuring output response to spending shocks—rise substantially, often exceeding those of QE. For instance, in , multipliers reached 1.25 on impact during ZLB episodes, compared to 0.62 in normal times, reflecting amplified effects due to constrained . Similarly, U.S. estimates show on-impact multipliers of 1.5 during ZLB periods versus 0.6 otherwise, as fiscal expansions boost private consumption and investment without relying on credit market transmission. Direct government spending, such as infrastructure projects or transfers, contrasts with QE's indirect mechanism by bypassing financial intermediaries and reaching households and firms more broadly. Proponents argue this enhances effectiveness in liquidity traps, where QE's benefits accrue disproportionately to asset holders via lower long-term rates and portfolio rebalancing, with limited pass-through to real activity. Money-financed fiscal stimulus—central bank funding of deficits without bond issuance—outperforms QE in simulations for most shocks, generating lower inflation and higher output by ensuring full deficit coverage rather than partial financing through asset swaps. Helicopter money, a variant involving outright transfers to citizens, amplifies this by directly elevating household wealth and spending, unlike QE's bank reserve expansion, which often remains idle. Debates center on fiscal stimulus's potential to address QE's shortcomings, including weak stimulus and inequality exacerbation, yet highlight risks like fiscal dominance eroding independence. While QE improves consolidated fiscal positions via output gains and interest savings, direct spending demands political discipline to avoid crowding out or unsustainable . Evidence from policy coordination models suggests fiscal tools substitute effectively for monetary easing at the ZLB, though effectiveness hinges on in monetary rules and regime uncertainty, which can dampen multipliers under high .

Targeted Asset Purchases and Sector-Specific Interventions

Targeted asset purchases under quantitative easing extend beyond broad sovereign debt acquisition to include specific securities like mortgage-backed securities (MBS) and corporate bonds, aiming to alleviate distress in particular markets. , the 's first round of QE, initiated in 2008, incorporated purchases of $175 billion in agency debt and $1.25 trillion in agency MBS to support the sector amid the . These interventions lowered MBS yields by compressing spreads over Treasuries, facilitating and stabilizing finance, though the direct transmission to broader lending remained limited due to impaired bank balance sheets. During the , the expanded targeted purchases to corporate markets through facilities like the Secondary Market Corporate Credit Facility (SMCCF) and Primary Market Corporate Credit Facility (PMCCF), announced on March 23, 2020. These programs enabled up to $750 billion in purchases of investment-grade corporate bonds and ETFs, with actual secondary market buys reaching about $14 billion by December 2020. Empirical analysis of transaction data from early 2020 shows these announcements reduced corporate spreads by 50-100 basis points for eligible bonds, enhancing and preventing a broader freeze, particularly for high-yield issuers. However, primary market interventions saw minimal uptake, suggesting signaling effects outweighed direct purchases in restoring confidence. In the , the European Central Bank's Asset Purchase Programme included the Corporate Sector Purchase Programme (CSP) from June 2016, targeting euro-denominated investment-grade s to support non-financial corporates. The CSP involved net purchases of €178 billion by its wind-down in December 2022, focusing on sectors underrepresented in bank lending. Studies indicate CSP announcements lowered yields by 20-30 basis points, with pass-through to firm investment varying by country, stronger in core economies than periphery due to structural constraints. Sector-specific interventions complement asset purchases, such as the ECB's Targeted Longer-Term Refinancing Operations (TLTROs), introduced in 2014 to channel low-cost liquidity to banks conditional on lending. TLTRO III, launched in November 2019, offered up to €2.32 trillion in four-year loans with rates as low as -1%, tied to loan volumes in non-financial private sectors. Evaluations using bank-level data reveal TLTROs reduced borrowing costs for eligible loans by 40-60 basis points and boosted credit growth by 1-2% annually in participating countries, though effectiveness diminished post-2020 amid rising rates and repayments. Critics argue targeted approaches risk allocative distortions by favoring select sectors, potentially amplifying in corporate markets where purchases propped up zombie firms with low . Proponents counter that broad QE's spillovers to non-targeted areas dilute impact, while precision in interventions like MBS or corporate buys better addresses frictions in transmission channels, evidenced by localized yield compressions without equivalent broad surges. remains context-dependent, with success tied to severity and complementary fiscal measures rather than standalone efficacy.

Unconventional Approaches like Neo-Fisherism and Monetary Financing

Neo-Fisherism posits that, in environments of persistently low nominal interest rates, a can stimulate by raising its nominal rate target, thereby anchoring higher expectations through the Fisher relation, where the nominal rate equals the real rate plus expected . This contrasts with orthodox , which lowers rates to boost ; neo-Fisherian reasoning holds that prolonged accommodation at the erodes expectations of future policy normalization, fostering deflationary dynamics, whereas signaling commitment to higher rates induces agents to anticipate rising prices to equate real rates. Economists such as of have formalized this in New Keynesian models, showing that a permanent increase in the nominal rate shifts the steady state upward without requiring real rate adjustments, assuming sticky prices and . Empirical assessments of neo-Fisherism yield mixed results. Analysis of U.S. postwar data from 1947 to 2015, using vector autoregressions and New Keynesian estimations, identifies a statistically significant neo-Fisher effect, where a 1 rise in the nominal rate correlates with 0.3 to 0.5 points higher long-run , particularly during periods of low rates like 2009–2015. However, counterevidence from structural models indicates that trend drives nominal rates rather than vice versa, with tests on U.S. data from 1959 to 2017 rejecting neo-Fisherian predictions in favor of conventional effects. A study spanning 1964 to 2019 further finds no causal link from policy rates to rates, attributing post-2008 low to supply-side factors rather than rate pegging. Proponents argue these discrepancies arise from model misspecification, emphasizing that neo-Fisherism applies specifically to trapped economies where unconventional easing like quantitative easing fails to reflate expectations. Monetary financing, often termed after Milton Friedman's 1969 analogy, involves central banks creating base money to directly fund government expenditures or citizen transfers, bypassing bond markets and rendering the injection permanent rather than reversible. Unlike quantitative easing, which purchases existing assets to influence market rates, monetary financing injects funds into the real economy via fiscal channels, potentially evading liquidity traps by boosting demand without increasing public debt burdens, as no repayment obligation arises. Proposals gained traction post-2008, with advocates like Adair Turner arguing in 2015 that overt could escape deflationary stagnation when interest rates hit zero, citing Japan's experience where QE expanded the Bank of Japan's to 75% of GDP by 2016 without commensurate . Critics highlight risks of fiscal dominance eroding independence, as direct financing historically correlates with episodes, such as Weimar in 1923 or in 2008, where money growth exceeded 300% annually. Theoretical models show that while temporary monetary financing raises output and without crowding out private investment—unlike debt-financed stimulus—its efficacy depends on credible commitment to non-reversal; expectation of future sterilization negates stimulus, reverting effects to standard QE. Empirical proxies, such as the European Central Bank's targeted longer-term refinancing operations from 2014 to 2021, which indirectly supported fiscal spending, boosted GDP by 1.3% without spiking above 2%, suggesting controlled implementation might mitigate . Nonetheless, legal prohibitions in treaties like the EU's Article 123 TFEU ban direct financing to preserve credibility, reflecting concerns that blurring fiscal-monetary lines incentivizes governments to exploit , potentially destabilizing long-term .

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