For such a radical change to our monetary system, the lack of understanding of quantitative easing (QE) and its impacts is worrying. That is one of the conclusions drawn from this month’s House of Lords economic affairs committee report, ‘Quantitative easing: a dangerous addiction?’
QE involves central banks creating money and using it to buy financial assets (usually government bonds). It is known as an ‘unconventional’ monetary tool, as opposed to the conventional monetary policy of raising and lowering interest rates. But as this new report highlights, the practice has very much become a conventional part of monetary policy. The financial crisis in 2007-08 kicked off rounds of QE in advanced economies, but the Covid-19 pandemic has produced an explosion in the practice. The below graph (taken from the report) shows how the Bank of England’s balance sheet has expanded far beyond historic norms over the past 18 months.
Bank of England balance sheet as a percentage of GDP
The balance sheets of the European Central Bank (ECB) and advanced country central banks around the world have similarly expanded, and even emerging market countries have gotten in on the act.
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