QE has become an integral part of monetary policy in a number of countries over the last ten years. Essentially it has been part of a strategy of cheap money brought in by central banks as a policy response the 2007-08 Global Financial Crisis amid fears of a return to deflationary depression experienced in the 1930s. Economic historians will surely debate the role of Quantitative Easing (QE) in staving off a depression for many years to come.

1. Economics of Quantitative Easing (QE)

2. Extract 1: Responses to the Global Financial Crisis
The financial crisis saw the global financial system fail in a way and on a scale that was
unprecedented. The sub-prime mortgage crisis that began in the United States quickly
spread to the rest of the world, including the UK, in large part due to the highly-
interconnected nature of the global system and the widespread use of complex
financial instruments that obscured true underlying exposure and risk.
Monetary authorities around the world adopted highly expansionary policy to counter
its negative effects on the global economy. Interest rates were reduced to their
effective lower bound but central bankers in many advanced economies judged that
additional easing in monetary policy was required to meet the objectives of monetary
policy. Consequently, consumers and firms have become accustomed to historically
low interest rates and “quantitative easing” (QE), an unconventional policy instrument
where the focus has shifted towards the quantity of money. Over the period between
March 2009 and January 2018, the total amount of gilts purchased has been £435
billion.
Source: ONS Economic Review, January 2018

3. Bank of England Policy Rate in the United Kingdom

4. What is quantitative easing?
•Quantitative easing (QE) is an unconventional form of
monetary policy that has been used in a number of
countries over the last decade including the UK, the USA
and the EU
•QE involves the introduction of new money into the
national supply by a central bank.
•In the UK the Bank of England creates new money
(electronically) to buy assets (mainly bonds) from financial
institutions such as the major insurance companies,
pension funds and commercial banks.

5. How does Quantitative Easing work in the UK?
1. The central bank (BoE) creates new money electronically to make large
purchases of assets (bonds) from the private sector
2. Increased demand for government bonds causes an increase in the market
price of bonds and therefore causes their price to rise
3. A higher bond price causes a fall in the yield on a bond (there is an inverse
relationship between bond prices and yields)
4. Those who have sold their bonds may use the extra funds to buy assets with
relatively higher yields such as shares of listed businesses and corporate
bonds
5. Commercial banks receive cash from asset purchases and this increases their
liquidity. This may encourage them to lend out to customers which will help
to stimulate an increased in loan-financed capital investment in the economy

6. Summary of main channels through which QE operates
Wealth effect - lower yields (interest rates) lead to higher share
and bond prices
Borrowing cost effect - QE lowers the interest rate on long term
debt such as government bonds and mortgages
Lending effect - QE increases the liquidity of banks and increased
lending from banks lifts incomes and spending in the economy
Currency effect - lower interest rates has the side effect of causing
the exchange rate to weaken (a depreciation) which helps exports

7. Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United Kingdom

8. Arguments for quantitative easing (UK context)
1. Important for the central bank to have additional policy
instruments other than changing interest rates especially if the
economy is experiencing a liquidity trap
2. Use of QE is likely to have helped staved off the threat of a
deflationary depression post 2008. Without QE, the fall in real
GDP would have been deeper and the rise in unemployment
greater – with significant long term economic & social costs
3. Lower long term interest rates have kept business confidence
higher and given the commercial banking system extra deposits
to use for lending

9. Bank of England Balance Sheet - Total Assets

10. Did QE help the UK avoid a deflationary depression?
"Monetary easing (including lower interest rates and QE) led
to lower unemployment and higher wages than would have
otherwise been the case, which particularly benefited
younger age groups because they are more likely to work
than older groups and because their job prospects tend to
be more pro-cyclical.”
Source: www.bankofengland.co.uk/-/media/boe/files/working-
paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-
between-2008-and-2014.pdf

11. A monetary stimulus to prevent a depression

12. Real Residential Property Prices for United Kingdom

13. Counter-arguments - criticisms of QE (UK context)
1. Ultra-low interest rates can distort the allocation of capital and also keep alive
zombie companies (note: this is a key criticism of Hayekian/Austrian school)
2. QE has contributed to a surge in share prices and property values, the latter has
worsened housing affordability for millions of people and also contributed to
increase in rents which has worsened the geographical immobility of labour.
3. QE has done little to cause an increase in bank lending to businesses, many
commercial banks have become more risk averse and charge higher interest
rates to business customers.
4. QE has contributed to a decade of ultra-low interest rates which has been bad
news for millions of people who rely on interest from their savings
5. Low interest rates and bond yields are a worry for pension fund investors
because they worsen their deficits. If companies must pay more into their
employee pension schemes, they therefore have less money to spend on
investment which could harm productivity growth in the long run

14. QE is not meant to be permanent!
• QE is not meant to be
permanent, we should consider
what will happen when the
Bank of England starts to
unwind QE and reduce their
holdings of government debt.
• People’s QE is now being
mooted - i.e. using a form of QE
to help fund green
infrastructure, education and
health/social care.

15. Economics of Quantitative Easing (QE)