Quantitative Easing

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DEFINITION of 'Quantitative Easing'

An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.

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BREAKING DOWN 'Quantitative Easing'

Typically, central banks target the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is now available in the economy. Additionally, banks may decide to keep funds generated by quantitative easing in reserve rather than lending those funds to individuals and businesses. 

For more information on the policy of quantitative easing, read Quantitative Easing: What's In A Name?

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