Quantitative Easing

QE is an unconventional monetary policy adopted by the central bank (e.g.: RBI) to stimulate the economy. Whenever the economy stagnates, and interest rates are very low (near ‘zero’), the central bank uses QE to increase the money supply in the economy. The way it is done is by buying government bonds or private. However there’s a catch: the money to buy the government bonds is ‘created digitally/electronically’ (it means that this money did not exist, it was created by the central bank, similar to just printing the money and infusing in the economy).

Risks

·        The money infused in the economy is supposed to help boost consumption by way of increased lending and borrowing from the banks.
So, it may happen that banks might not lend the money to people or people might not borrow the money at the new rate of interest.

·        There is the chance of sudden inflation (high). This happens due to the excess supply of money in the market but fewer goods to satisfy the demand, which will increase the prices of the goods.

·        Creating of money from thin air reduces the value of the money. This means that it’s value decreases in the international market. Currency Depreciates, which is good for the export industry but bad for imports.
So, the overall effect of this will depend on other economic conditions.

This method of reviving economic activity was used by USA (FED), Japan (bank of Japan), UK (bank of England) and European bank. While FED and Bank of England were successful in implementing the policy, Bank of Japan which was the first to use QE, failed to stimulate any economic activity.

Quantitative easing is a good method of reviving economic activity, provided it is used infrequently, and supply of money is not very huge and sudden, in which case inflation follows few years down the line.