Quantitative easing
Large-scale central bank purchases of bonds, paid for with newly created reserves, used to ease financial conditions once the policy rate is already near its floor.
Also called: asset purchases, large-scale asset purchases, APP, PEPP.
Mechanically, QE is an asset swap. The seller gives up a bond and receives a deposit; the seller's bank receives reserves. Nobody's net wealth changes much — the composition of what the private sector holds does.
Because it removes duration and takes high-quality collateral out of the market, QE works mainly through the price of risk and the shape of the yield curve, not through handing anyone spendable money.
The ECB ran the same mechanism under its Asset Purchase Programme and, from 2020, the Pandemic Emergency Purchase Programme. The instrument names differ; the balance sheet entries do not.
The mechanics
- Central bank
- Assets: bonds up. Liabilities: reserves up by the same amount.
- Seller's bank
- Assets: reserves up. Liabilities: the seller's deposit up.
- Collateral market
- Pristine collateral leaves circulation, which tightens repo markets.
The common misreading
That QE forces banks to lend, or is inherently inflationary via the multiplier. It creates reserves, and reserves are not what constrains lending — which is why a decade of QE coincided with historically weak credit growth.
Related terms
- Quantitative tighteningThe reverse of QE — shrinking the central bank's balance sheet, usually by letting bonds mature without reinvesting, which destroys reserves.
- Bank reservesDeposits that commercial banks hold at the central bank — the settlement asset banks use to pay each other, and a liability of the central bank rather than an asset it owns.
- Monetary baseThe total of banknotes in circulation and commercial bank reserves — every form of money that is a direct liability of the central bank.
- Primary dealerA trading counterparty of the New York Fed, obliged to bid at every Treasury auction and to make markets in government securities — the channel through which open market operations reach the financial system.
Primary sources
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