Quantitative easing in practice

In my latest blog for "Reading and Understanding Economics" I explain the economic policy tool commonly referred to as quantitative easing. I am now going to discuss the use of this measure in practice. It was last used by the Bank of Japan (BoJ) in early 2001 when deflationary trends became particularly severe.

What did the BoJ do?

1) The BoJ added reserves to their domestic banking system through open market operations and by directly purchasing government bonds in the secondary market.

2) the BoJ maintained short-term interest rates at close to zero for a prolonged period.

The aim of this twin attack was to get the banks to start lending again to companies as well as individuals.

The general consensus now is that these policy measures had only a minimal impact in terms of restoring economic activity to Japan. However, it is generally accepted that it did help to stop price deflation.