Saturday, 19 December 2020

Quantitative easing: how is this done?

Central banks use quantitative easing to create money

Faced with the economic meltdown following the 2008 crash, some central banks opted to stimulate their moribund economies via quantitative easing.

Quantitative easing uses the unlimited purchasing power of central banks to buy large quantities of bonds in the open market to pump cash into the economy.  

Central banks use quantitative easing to create money where previously none existed.

How is this done?

A central bank "creates" money every time it dips into its "vaults" - essentially a black hole of unlimited financial resources - to buy existing bond from banks or other investors.

These purchases, often referred to as open market operations, inject new money into the economy.  

The bank, instead of holding bonds, is now holding the "cash" it got from the central bank.  

This money can now be made available for loans to consumers and individuals, thereby stimulating economic growth.

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