Friday, March 6, 2009

Quantitative easing

Quantitative easing is the creation of new money out of 'thin air' by a central bank, and its injection into the banking system. The aim is to increase the amount of deposits in private banks so that, by way of deposit multiplication, they can increase the money supply by increasing debt (lending).
'Quantitative' refers to the money supply; 'easing' refers to reducing the pressure on banks.[1] A central bank can do this by using this new money to buy government bonds (Treasury securities in the United States) in the open market, or by lending the new money to deposit-taking institutions, or by buying assets from banks in exchange for currency, or any combination of these actions. These have the effects of reducing interest yields on government bonds, and reducing inter-bank overnight interest rates, and thereby encourage banks to loan money to higher interest-paying bodies

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