💡 QUANTITATIVE EASING 💡
With quantitative easing, a central bank purchases asset on the open market. The central bank buys the safest asset in the fixed income market like government bonds. However, in some instances, such as the Bank of Japan, central banks have moved on to other asset classes that are at higher risk.
The central bank injects money into the economy by purchasing these bonds, which is how quantitative easing technically stimulates the economy. These institutions that sold those bonds to the central bank now have the excess money to use for another purpose. If they are a financial institution, they might use it to invest in another kind of asset, which then supports the market for that asset; if they are a bank, they might use it to lend money to clients and customers, which would help to boost the economy. If they are retail investors who would now have money from these bonds, retail investors may again spend this liquidity in the retail or housing market.
With the help of quantitative easing, the economy is loosened, and more money is introduced into the system, enabling economic growth.
During the initial stages of COVID-19 (March 2020) spread through the economy. Most of the central banks did quantitative easing in order to boost their economy, especially the US, which did this on a large scale.
💡 QUANTITATIVE TIGHTENING 💡
Quantitative tightening is exactly the opposite of quantitative easing, whereby selling assets instead of purchasing them in that market, the central bank is taking back that money supply. In doing so, the central bank reduces the amount of circulating money in the economy by selling all of the bonds that are currently on their balance sheet and other assets.
Globally, different central banks will approach Quantitative easing and Quantitative tightening at varying paces; this is all closely related to what is happening in the local economy, which serves as the foundation for the choice of whether easing or tightening is appropriate.
Right now (August 2022) Quantitative tightening is being done by central banks across the globe in order to reduce the money supply in the economy and control inflation. This step is being taken due to the excess Quantitative easing during March 2020. So, this is a vicious cycle that keeps on following during crisis and inflation
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