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Increasing the money supply, Quantitative Easing, QE
In 2010, you repeatedly heard the above words mentioned on economic websites and articles. Today i would like to discuss more on this.
One of the tools of a monetary policy to contain negative inflation and prevent low GDP is the expansion and increase of money supply. To increase the money supply, usually the central bank “prints” money so as to encourage open market operations such as buying and selling securities. It is the objective that this money growth leads to expansion in the economy. This is known as increasing the money supply or in other words, Quantitative Easing.
The start of such monetary policy of expansion of money supply in most academic discussions refer to the operations by Bank of Japan to combat negative inflation and widespread recession in the late 1999 and early 2000. During the recent recession / global economic and financial crisis of 2008, policies to increase the money supply were employed by the US Federal Reserve. The US Federal Reserve chief Mr Ben Bernanke and monetary policymakers in the United States attempted to create liquidity in the economy and to prevent the recession from spreading by engaging in quantitative easing and by reducing the interest rates to near zero.
It seems that when central banks are faced with recession and the lack of liquidity in the economy, monetary policies to keep the currency easily available and to increase the money supply are often pursued simultaneously. Usually open market operations and bonds trading are done. When commercial banks are faced with an overwhelming amount of money and excess liquidity, loans are made out to firms and investments are encouraged.
Having said so, Japanese banks experienced in money supply expansion operations seem to face challenges curbing the negative inflation and economic downturn. Little success and prosperity was achieved and Japan faces little economic growth.
Have a great holiday and advance Happy New Year.
Masoud is a businessman and a Senior Forex Koala. Connect with him at our page on Facebook.
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