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> A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of th
by acover 6y ago
> 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.
Quantitative easing increases the money supply. They've injected trillions. Who got it is a separate question.
- wcoenen 6y agoQuantitative easing only increases "bank reserves" in the accounts at the fed, not the money supply. The accounts at the fed are an isolated system. To increase the money supply, commercial banks need to create money via loans.
- acover 6y agoThe reserve requirement is 0%, increasing a bank's reserves doesn't allow them to lend more. There are mechanisms that allow an increase in bank reserves to be spent in the economy without loans [0]. [0] https://positivemoney.org/how-money-works/advanced/how-quantitative-easing-works/ https://positivemoney.org/how-money-works/advanced/how-quant...
- wcoenen 6y agoI read the post you linked, and was surprised by the description of money being created when a UK bank buys a government bond from a pension fund. I thought commercial banks were only allowed to create money when creating loan assets. Is creation of money when banks buy assets a unique feature of the UK banking system, or does it also happen elsewhere? If banks would buy financial assets and create money in the process as described in the post, then that would certainly be inflationary. (e.g. I can imagine hypothetical legislation that forces banks to buy government bonds, that would be the time to run for inflation protection.) As far as I understand, this has not happened, or at least not to the degree that it caused inflation. The effect of QE has been to increase bank reserves but not the money supply, which is why we haven't seen inflation since the financial crisis.
- acover 6y agoThe purpose of QE is to cause inflation, the federal reserve is explicitly trying to avoid a Japan situation where there are low interest rates and deflation [0]. To avoid a deflationary spiral [1]. I can't find a source that explains the mechanism for how QE affects the economy. [0] https://www.investopedia.com/articles/investing/051315/what-deflation-and-how-do-central-banks-fight-it.asp https://www.investopedia.com/articles/investing/051315/what-... [1] https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral