Quantitative Easing is the unconventional monetary policy in which the central bank decreases the interest rates country by buying government securities and other securities and increasing the money supply in the economy. The goal of this policy is to facilitate an expansion of private bank lending, if private banks increase lending, it would increase the money supply. Besides this, if the central bank also purchases financial instruments that are riskier than government bonds, it can also lower the interest yield of those assets. Quantitative easing, and monetary policy in general, can only be carried out if the central bank controls the currency used in the country.
Quantitative easing was first used by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s. The Bank of Japan had maintained short-term interest rates at close to zero since 1999. Under quantitative easing, the BOJ flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves and therefore little risk of a liquidity shortage. The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. The BOJ increased the commercial bank current account balance from ¥5 trillion to ¥35 trillion over a four-year period starting in March 2001. The Bank of Japan also tripled the quantity of long-term Japan government bonds it could purchase on a monthly basis.
After the Financial Crisis in 2007-2008, Federal Bank of USA had resorted to Quantitative Easing (QE) by buying treasuries and securities. The Federal Bank expanded its balance sheet dramatically by adding new assets and new liabilities without "sterilizing" these by corresponding subtractions. To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money increases the size of bank reserves in the economy by the quantity of assets purchased. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment. Today, interest rates on everything from government bonds to mortgages to corporate debt are probably lower than they would have been without QE. If QE convinces markets that the central bank is serious about fighting deflation or high unemployment, then it can also boost economic activity by raising confidence. Several rounds of QE in America have increased the size of the Federal Reserve's balance sheet—the value of the assets it holds—from less than $1 trillion in 2007 to more than $4 trillion now.
On 19 June 2013, Ben Bernanke announced a "tapering" of some of the Fed's QE policies . Specifically, he said that the Fed could scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting. He also suggested that the bond-buying program could wrap up by mid-2014. Due to this Fed Tapering( reversal of Quantitative easing), there are chances that countries like India might face a decrease in business owing due to the dependence on USA for its services sectors. But recently as per an article in Economic Times The RBI Governor Mr.Raghuram Rajan said that India is ready to deal with Fed Tapering.
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