Quantitative easing (QE) is a form of unconventional monetary policy.
QE is used by a central bank to control the rate of inflation within the jurisdiction for which it is responsible when being at or near the zero bound prevents a central bank using conventional monetary policy and the control of bank base rate to achieve that goal.
When using quantitative easing a central bank buys the debt or bonds of the government of its jurisdiction (and occasionally commercially issued debt as well) in the open market and then holds those bonds under its ownership.
The objective of QE is to increase the price of government debt issued by the jurisdiction undertaking the exercise by reducing the quantity of that debt available for sale in financial markets, which scarcity inflates their value, which in turn reduces the effective rate of interest paid on it.
The theoretical justification for QE is that reducing the rate of return on government debt supposedly forces investors to seek an adequate return on their funds elsewhere. It is presumed that they will as a result invest them in risker assets, so providing money for investment in private markets. It is in turn presumed that this investment will stimulate growth in the GDP of the jurisdiction.
During the Covid crisis this did not, however, appear to be the motive of central banks using QE. Instead, those central banks appeared to be funding the expenditure of the governments that controlled or owned them during this period[1].
The practical consequence of quantitative easing is to increase the central bank reserve account balances of commercial banks held with the Bank of England, with the increase representing the amount that a central bank has paid to buy back the bonds previously issued by the government that owns or controls it.
Since the central bank reserve accounts held by commercial banks are a significant part of what is termed ‘base money' (see separate entry) the consequence is that QE increases that part of the money supply because the sums paid for the bonds purchased by the central bank inflate these balances, meaning that QE results in, or provides cover to, money creation by a central bank although many central banks appear to deny this, as do almost all politicians since this process proves the existence of what they call the magic money tree.
For a critique of quantitative easing see unconventional monetary policy.
See also the QE process, which is an essential addition to this post.
[1] As the New Economics Foundation has shown, between April 2020 and July 2021 99.5% of UK government deficits were funded by quantitative easing. https://neweconomics.org/2021/10/99-5-of-government-covid-debt-has-been-matched-by-so-called-bank-of-england-money-printing
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