What is meant by quantitative easing, and how is it different from regular monetary policy?
Answer (1)
Quantitative easing (QE) is a special tool used by central banks—like the Federal Reserve in the U.S. or the Bangko Sentral ng Pilipinas (BSP)—to help the economy when traditional methods are not working. It is different from regular monetary policy in both purpose and method.Normally, central banks control the economy by adjusting interest rates. If the economy is weak, they lower interest rates to make borrowing cheaper so businesses and people will spend more. But what happens when interest rates are already very low—close to 0%—and the economy is still struggling? That’s when QE is used.In quantitative easing, the central bank creates new money and uses it to buy financial assets like government bonds or mortgage-backed securities. By doing this, they increase the amount of money in the banking system. Banks then have more cash to lend to businesses and consumers. This increases spending, investment, and eventually, jobs.During the 2008 financial crisis, the U.S. Federal Reserve used QE several times. It bought trillions of dollars’ worth of bonds to keep the financial system working. The goal was to make sure that businesses could borrow money, continue operations, and avoid layoffs.The BSP in the Philippines used a similar idea during the COVID-19 pandemic. Although not called QE directly, it bought government bonds to support the economy and make sure there was enough liquidity. This helped small businesses survive and protected jobs.Regular monetary policy changes interest rates.Quantitative easing adds new money to the system by buying financial assets.QE is like giving the economy an extra push when it’s too weak to stand on its own. But it must be used carefully. If too much money is added, it can lead to inflation, where prices go up too fast.
