Quantitative easing (QE) refers to a monetary policy whereby central banks purchase predetermined amounts of government bonds or other financial assets to inject liquidity directly into the economy. It is considered an unconventional form of monetary policy, as opposed to more traditional measures like adjusting interest rates.


QE is usually implemented when standard monetary policy has become ineffective due to extremely low interest rates. With interest rates already near zero, central banks have resorted to QE as a means to further stimulate the economy. The goal is to drive down long-term interest rates and encourage lending and investment.

Some key aspects of quantitative easing include:

What is Quantitative Easing

Quantitative easing involves central banks creating new electronic money to buy financial assets, like government bonds, from banks and other financial institutions. This differs from the more common monetary policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.

QE directly increases the money supply in the economy by purchasing assets from commercial banks using freshly created electronic funds. It allows central banks to stimulate the economy by directly lowering interest yields on financial assets when standard expansionary monetary policy has become ineffective.

How Quantitative Easing Works

The mechanics of QE are fairly straightforward:

  • Central banks create new money through digitally expanding their balance sheet. They use this money to purchase government securities and other financial assets from banks and private institutions.
  • This buying pressure helps lower yields on those assets. Long-term government bond yields in particular are driven down, which brings down interest rates on mortgages, corporate debt and other important lending channels.
  • With long-term rates reduced, banks offer more attractive deals for various loans, encouraging business investment and consumer spending. Market sentiment also improves when assets prices rise.
  • The influx of new money into the financial system also encourages banks to lend more freely, boosting broader economic activity.

Essentially, QE serves to make financial conditions more favorable through lower borrowing costs and eased credit channels. This helps stimulate aggregate demand in the sluggish economy.

Why Do Central Banks Use Quantitative Easing

There are several key reasons why a central bank might initiate a quantitative easing program:

  • To stimulate the economy – QE is used when interest rates are already near zero and cannot be reduced further. Purchasing financial assets to lower borrowing costs can still help boost economic growth.
  • To increase liquidity in the banking system – Expanding the central bank’s balance sheet through asset purchases adds liquidity directly into the financial system.
  • To improve market confidence – As asset prices rise from the buying pressure, market sentiment tends to improve.
  • To lower exchange rates – QE tends to weaken a domestic currency, helping make exports more competitive.
  • To avoid deflation – Injecting new money supply can help avoid devastating deflationary spirals.
  • To enable other unconventional monetary policies – QE can facilitate operations like twist purchases or funding for lending programs.

So in short, when the traditional transmission mechanisms for monetary policy become ineffective, QE provides central banks a way to still stimulate the broader economy through financial markets.

History of Quantitative Easing

While QE was uncommon for most of modern history, its use has picked up since the turn of millennium, especially following the 2007-2008 global financial crisis:

  • 2001 – The Bank of Japan initiates the first QE program to fight deflation and spur economic growth after interest rates were already at zero. It purchases trillions of yen worth of government bonds.
  • 2008 – The Federal Reserve begins its first round of QE following the housing bubble collapse and ensuing recession. It would purchase hundreds of billions in mortgage-backed securities and treasuries.
  • 2010 – With its key interest rate near zero, the Bank of England turns to QE to bolster recovery. It focuses on buying government gilts to lower yields.
  • 2015 – The ECB unveils a €1.1 trillion euro QE package amid slow inflation and high unemployment in the Eurozone. It includes public and private bond purchases.
  • 2020 – Many central banks launch new QE programs in response to the COVID-19 pandemic, including the Fed, BOE, and BOJ.
  • 2021 – With economies recovering, some banks begin tapering asset purchase programs, including the Fed and Bank of Canada. The ECB continues bond buying.

While QE policy was controversial initially, it became widely used as a monetary tool over the last decade, seen as necessary to stabilize economies and financial systems.

Quantitative Easing vs. Conventional Monetary Policy

QE differs significantly from conventional monetary policy on a few levels:

  • Target – Traditional policy targets short-term interbank interest rates. QE targets quantities of long-term securities bought.
  • Scope – QE impacts financial markets and assets directly. Traditional policy works through banks.
  • Transmission – QE aims for portfolio rebalancing and wealth effects. Traditional policy uses interest rate adjustments.
  • Conditions – QE is considered unconventional and used when rates are near zero. Traditional policy is the normal approach.
  • Constraints – QE can expand central bank balance sheets indefinitely. Traditional policy has more inherent constraints.

While QE is seen as an extraordinary measure, traditional tools still work better under normal circumstances. But when rates approach zero, QE provides central banks a way to still transmit stimulus to the broader economy.

Effectiveness of Quantitative Easing Policies

The effectiveness of QE policies remains debated by economists, though in general they are seen to have positively impacted economies:

  • QE has succeeded in lowering long-term interest rates in most cases. Corporate, mortgage and sovereign debt yields have declined.
  • Bank lending tends to increase following QE programs. More reserves and lower rates make it easier for banks to find qualified borrowers.
  • Financial conditions ease broadly. Asset prices, liquidity, sentiment, and exchange rates all tend to benefit from QE activity.
  • Wealth effects from rising asset prices boost consumption and investment at the margins. Homeowners also benefit from lower mortgage rates.
  • QE appears to have softened the blow of recessions and accelerated recoveries versus no policy action.
  • At the same time, QE has failed to spur inflation or hit growth targets in some cases. Other factors may be overriding its impacts.
  • Risks include inflated asset prices, volatility when purchases slow, and reduced incentives for fiscal discipline.

On balance, QE has shown it can provide notable economic stimulus, especially when traditional monetary policy is constrained near the zero lower bound. But it is not a panacea and should be considered carefully.

Global Quantitative Easing Programs

Some of the most prominent QE initiatives include:

United States QE Programs

  • QE1 (2008): The Federal Reserve purchased $600 billion in mortgage-backed securities and $300 billion in Treasuries. This helped stabilize financial markets during the Great Recession.
  • QE2 (2010): The Fed purchased another $600 billion in Treasuries to boost the sluggish economic recovery.
  • QE3 (2012): The third round of QE entailed open-ended purchases of $40 billion mortgage-backed securities per month.
  • QE4 (2020): In response to the COVID crisis, the Fed pledged essentially unlimited QE, buying Treasuries, MBS, and even corporate bonds.

Bank of England QE Programs

  • Asset Purchase Facility (2009) – The BoE bought £200 billion in government bonds and corporate bonds over several rounds to hit its inflation target.
  • QE2 (2011) – A second round of asset buying totaled £175 billion pounds sterling, again with government bonds comprising most purchases.
  • QE3 (2020) – The BOE restarted its QE program in 2020 to stabilize markets during the COVID pandemic. It added £450 billion in purchases.

European Central Bank QE

  • Securities Market Programme (2010) – The ECB bought €210 billion euro in sovereign bonds to support Eurozone periphery economies and prevent contagion.
  • Expanded Asset Purchase Programme (2015) – Monthly €60 billion euro purchases of government bonds and other assets to combat low inflation and growth.
  • Pandemic Emergency Purchase Programme (2020) – In response to COVID-19, the ECB added a €1.35 trillion euro asset purchase scheme.

Bank of Japan QE

  • Comprehensive Monetary Easing (2010) – The BOJ initiates QE with a ¥35 trillion yen asset purchase program targeting government bonds, commercial paper, corporate bonds, ETFs and REITs.
  • QQE with a Negative Interest Rate (2016) – BOJ adds negative rates and accelerates QE purchases to ¥80 trillion yen annually when inflation slips.
  • Yield Curve Control (2016) – BOJ shifts to targeting short-term and long-term yield levels through flexible QE purchases.

Risks and Criticisms of Quantitative Easing

Despite widespread adoption, quantitative easing also garners some valid criticism and carries certain risks policymakers should consider:

  • Artificially elevated asset prices – QE can inflate certain asset values creating bubbles that inevitably burst.
  • Volatility when purchases slow – Markets may react negatively once QE programs wind down.
  • Limited impact on real economy – Cheap money may not fully transmit to business and household borrowing and spending.
  • Reduced fiscal discipline – If QE eases borrowing constraints for governments, they may spend irresponsibly.
  • Income inequality effects – As asset holders benefit disproportionately, wealth gaps tend to rise.
  • Resource misallocation – Market distortions and mispriced risk could lead to suboptimal investment outcomes.
  • Constraints on monetary policy – Heavy asset buying leaves little ammunition to deal with future crises.
  • Risk of high inflation – Rapid monetary expansion could spark higher inflation if velocity of money increases.

While QE risks are real, responsible policymaking can mitigate them. Central banks should clearly communicate objectives, implement gradually, and deploy appropriate macroprudential tools.

The Future of Quantitative Easing

Central bank balance sheets exploded in size over the last decade thanks to QE asset accumulation. Now the big question is what’s next for quantitative easing policies. Several possible scenarios include:

  • Continued asset purchases – Central banks like the ECB and BOJ maintain QE programs for the foreseeable future given still sluggish growth and/or low inflation.
  • Gradual tapering – As conditions improve, banks such as the Fed, BOE and BOC begin slowly unwinding and tapering purchases.
  • Holding assets to maturity – Central banks maintain enlarged balance sheets by holding assets to maturity rather than actively selling.
  • Outright sales – Once growth and inflation recover meaningfully, assets get gradually sold back to financial markets.
  • Issuing central bank bills – Assets stay on balance sheet but some liabilities in the form of redeemable bills are issued to absorb liquidity.
  • Quantitative tightening – Central banks take more direct action to reduce reserves and tighten policy by selling assets.

The winding down of QE and normalization of policy will present a major challenge. It will likely happen slowly and communicatively to avoid market disruptions. But QE stimulus tools will remain a critical part of the central banking toolkit.


Quantitative easing represents a relatively new and unconventional approach to monetary policy adopted by central banks over the last decade. It involves creating new reserves to purchase financial assets as a means to inject liquidity, ease financial conditions, stimulate lending, and ultimately support growth and inflation.

While not without valid criticism and risks, QE has arguably provided crucial economic stimulus at times when traditional interest rate adjustments lost efficacy near the zero lower bound. As long as economies periodically face crises and downturns, QE offers central banks a way to still transmit monetary stimulus even once rates reach their practical minimums. While the massive expansion of central bank balance sheets will eventually need to be unwound carefully, quantitative easing policies figure to remain an essential part of the macroeconomic playbook.