Quantitative easing and how it works

Overview

Asset purchases with newly created reserves, the routes through which they are meant to raise spending, and the distributional criticisms made of them.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is quantitative easing?

   Model answer

   Quantitative easing is the purchase of financial assets by a central bank using newly created reserves. The policy aims to lower long-term interest rates and raise spending.

2. 2

   When did the Bank of England begin quantitative easing?

   Model answer

   The Bank of England began quantitative easing in March 2009. The programme was a response to the financial crisis and to the zero lower bound.

3. 3

   Which assets does the Bank of England buy under quantitative easing?

   Model answer

   The Bank of England buys mainly UK government bonds, known as gilts. A much smaller quantity of high-grade corporate bonds has also been purchased.

4. 4

   Who does the Bank of England buy gilts from under quantitative easing?

   Model answer

   The Bank of England buys gilts from pension funds, insurers and other financial institutions. The Bank of England does not buy bonds directly from the government.

5. 5

   Why is it misleading to describe quantitative easing as printing money?

   Model answer

   Quantitative easing creates central bank reserves electronically rather than printing notes. The quantity of cash in circulation is unchanged by the policy.

6. 6

   How does quantitative easing lower long-term interest rates?

   Model answer

   Large purchases of gilts raise their price and therefore lower their yield. Other long-term borrowing costs fall in line with gilt yields.

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