Understanding the Difference of QE and QQE(Quantitative and Qualitative Easing)

Central banks around the world have used various monetary policy tools to stimulate economies during financial crises and periods of economic downturn. Two of these tools, Quantitative Easing (QE) and Quantitative and Qualitative Easing (QQE), have played pivotal roles in these efforts. This extended article provides a deeper dive into the differences between QE and QQE, supplemented with real-world examples to illustrate their impact.

What is Quantitative Easing (QE)?

Quantitative Easing is a monetary policy wherein a central bank purchases predetermined amounts of government bonds or other financial assets to stimulate the economy. The primary aim is to increase the money supply and lower interest rates, encouraging borrowing and investment.

Real-World Example of QE:

United States Federal Reserve: In response to the 2008 financial crisis, the Federal Reserve launched several rounds of QE, buying trillions of dollars in government bonds and mortgage-backed securities. These actions helped lower long-term interest rates and supported the housing market, as well as broader economic recovery.

What is Quantitative and Qualitative Easing (QQE)?

Quantitative and Qualitative Easing, while similar to QE in its approach to increasing the monetary base, also focuses on enhancing the quality of assets on a central bank’s balance sheet. It was first adopted by the Bank of Japan (BoJ) to combat deflation and stimulate growth in an economy that had been stagnant for decades.

Real-World Example of QQE:

Bank of Japan:

Introduced in 2013, Japan’s QQE program not only involved purchasing government bonds but also included riskier assets like ETFs and real estate investment trusts (REITs). This approach was aimed at influencing longer-term interest rates and asset prices more directly. By committing to continue these purchases until a 2% inflation target was achieved, the BoJ sought to change inflation expectations and economic behavior fundamentally.

Key Differences Between QE and QQE

1.Scope of Asset Purchases:

QE Example: During the Eurozone crisis, the European Central Bank (ECB) implemented QE by purchasing primarily government bonds to inject liquidity into the banking system.
QQE Example: The BoJ’s QQE program included purchases of longer-term government bonds and additional assets like ETFs, extending its impact to different market segments.

2. Impact on Expectations:

QE: It focuses mostly on the short-term lowering of interest rates.
QQE: It also addresses long-term economic expectations, specifically inflation and growth prospects.

3. Commitment Level:

QE: Often operates within set time frames or until certain benchmarks are reached.
QQE: In Japan, the program is open-ended, continuing until inflation consistently holds at the target level, emphasizing the commitment to altering economic conditions.

4. Monetary Base Expansion:

QE: The expansion is generally quantitative and targets specific amounts.
QQE: Expands the monetary base quantitatively and qualitatively, affecting both the amount and type of assets purchased.

Conclusion

The nuanced differences between QE and QQE highlight the evolving nature of central banks’ approaches to monetary policy. By examining these examples, it is evident that while both strategies aim to stimulate economic activity, QQE goes a step further by attempting to reshape market expectations and behavior over the long term.

This strategy reflects a deeper commitment to altering economic fundamentals, which can be particularly crucial in economies facing persistent deflationary pressures and stagnant growth, as seen in Japan. Understanding these tools and their applications provides valuable insights into how central banks can influence economic outcomes in challenging times.