Printing money/Quantitative easing

Quantitative easing is a euphemism for printing money through a central bank's open market operations. The purchase of government bonds is used to increase the money supply. It also produces a seigniorage profit for the government (including the central bank).

Open market operations directly change the monetary base. The effect on broad money depends on the money multiplier.

Under normal circumstances, printing money is inflationary and avoided for just that reason (otherwise governments could simply buy back their entire national debt). During recessions the economy can absorb an increase, especially if the economy is so slow that deflation would otherwise occur.

Apart from buying government bonds, central banks can increase the money supply by buying corporate debt, but that is a comparative rarity even during recessions.

In fact, a government could increase the money supply by printing money and spending it in any way — in practice they do not, but rather issue bonds to raise money to spend, while the central bank buys and sells these same bonds to control the money supply. The net effect is the same, but it separates responsibilities for fiscal and monetary policy.

A certain amount of money needs to be created under normal cirumstances. The money supply needs to increase at a rate equal to real terms economic growth plus the desired rate of inflation. The use of the term “quantitiative easing” implies that, rather than following economic growth, the money supply is being sharply increased to stimulate the economy. In most contexts “printing money” means the same. The danger is that this could lead to high inflation: if not immediately, by making it harder to control inflation once growth returns.

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