Monetary Easing Definition. What is Monetary Easing? The term is used to describe any actions taken by a central bank to simulate the domestic economy by either lowering interest rates or expanding the size of the money supply in circulation by purchasing securities on the open market. These actions are designed to speed up the velocity of money and reduce pressure on banks, thereby providing external stimulus to the economy. If prevailing interest rates, i.e., the bank rate, discount rate or interbank rate, are already at low or near zero levels, then the more definitive process is referred to as Quantitative Easing. The central bank creates money by purchasing government or corporate bonds or other financial assets from banks, thereby creating new deposits for banks. Increased banking reserves lead to lending and an expansion of the money supply. The downside risk of this type of policy is that the economy may become over stimulated and produce inflation or that banks will not lend the funds due to credit restraints and over booked loan loss reserves. These policies have been ineffective when “balance sheet recessions” occur, as they have in Japan during the early 2000s and currently in both the United Kingdom and United States in 2008-9.
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