Quantitative Easing (QE) is a type of expansionary monetary policy that occurs when there is no longer an option of reducing interest rates further or reducing interest rates in isolation would not be enough to create the shift in AD required.

Why do Central Banks Use Quantitative Easing?

There are a couple fo closely linked aims that QE helps to achieve,

1. Creating a boost to AD as consumers and frims increase consumption and investment.
2. Boosting inflation - reducing the likelihood of deflation.
3. Lowering interest rates.

How do Central Banks Implement Quantitative Easing?

For a level economists we can actually be quite brief about the process of QE.

1. The central bank - The Bank of England - creates digital money in its internal systems.
2. The central bank uses this money to buy government bonds and corporate bonds.
3. Any bank, firm or individual that has sold bonds to the central bank now have increased liquidity, cash availability, in order to spend.
4. Banks are more able to make loans to consumers & firms and the government are more able to implement expansionary fiscal policies.
5. As a further boost, this increase in the money supply also causes interest rates to fall which incentivises consumers and firms to take out the loans which have become available.  The falling interest rate can be seen in the diagram below.

Money supply diagram showing the increase in money supply following a round of QE

Alternative Policies to quantitative Easing

There are a few alternatives to QE.  Direct cash provision and helicopter money are both monetary policy instruments that can be used in order to boost AD. The key difference is that the banks are not needed in these alternatives and cash is provided directly to the consumers.