Economics Year 13 revision Day 21 - Quantitative Easing
On Day 21 of the Year 13 Recap we review the policy tool of Quantitative Easing (QE) and why it is was introduced post-2008.
After the 2008 financial crisis, many central banks around the world sought to stimulate their respective economies by slashing interest rates. This relates back to the chain of reasoning introduced in the traditional transmission mechanism. However, one of the limitations of interest rate changes is that the effectiveness of this policy tool erodes as the bank rate gets closer to zero.
Therefore, many central banks found themselves in a position where interest rates could not feasibly go any lower, but the economy and the inflation rate still needed lifting. Central banks pursued different ways in which the economy could be stimulated and one of these policies was Quantitative Easing. As this is a recent string to the central bank’s policy tools bow, you need to be comfortable with the process and overall consequences of QE heading into a macro exam.
Here Jacob reviews the basic concepts of the Quantitative Easing (QE).