How Quantitative Easing Works and Why Money Creation Has Limits
Summary
The document asks whether expanding the money supply can fund public services in a low-growth, deflationary economy, and whether quantitative easing should be understood as government money creation rather than genuine borrowing. It points to central-bank purchases of government bonds, interest flows back to governments, and occasional transfers from central banks as reasons the debt might seem less costly.
The response cautions that direct central-bank financing of government spending is restricted in most developed Western countries, so it is not generally the main channel for monetary policy. It refers readers to explanations of several monetary-policy transmission channels and to a review paper, but does not describe those channels in detail or establish whether QE is effective. The discussion is brief and leaves important questions unresolved, including how effects vary by country, institutional rules, economic conditions, and the distribution of costs and benefits.
Key ideas
- The question distinguishes central-bank bond purchases from direct financing of government spending.
- Central-bank profits and transfers do not by themselves settle how QE affects public debt or spending.
- The response says direct central-bank financing is restricted in many developed Western economies.
- The document points to monetary-policy transmission channels but does not explain or evaluate them in depth.
Tags
Full text
# Is printing money really a bad thing? # Is printing money really a bad thing? I have 2 related questions about increasing money supply: (I know high school level economics.) 1) In an economy which has low growth and deflation, is it at all a bad thing to print money? In fact, wouldn't printing money mean that the government could pay for extra public services that another government cannot afford, which seems like a very good thing in these days of austerity measures? 2) Quantitative Easing is sometimes called "printing money". As I understand it, the central bank buys government bonds, but as I read goverments get back a lot of central bank profits (i.e. the interest on those bonds), and also governments occasionally grab a lump sum from the central bank (e.g. UK 2012). Therefore the debt from QE doesn't sound like real debt, and instead it seems to amount to the government printing money. So why is QE reported in the press as a bad thing in the EU and Japan? (I.e. is it not a golden opportunity to boost public services and bring people into work, while inflation is not a concern?) ## Answer by fni (score 1) https://quant.stackexchange.com/a/16325 > 1) In an economy which has low growth and deflation, is it at all a bad thing to print money? In fact, wouldn't printing money mean that the government could pay for extra public services that another government cannot afford, which seems like a very good thing in these days of austerity measures? The Central Bank can’t finance Government expenditure in almost all the developed western Countries, so this doesn’t seem to be the main channel through which Monetary policy works. > So why is QE reported in the press as a bad thing in the EU and Japan? It depends on which kind of press do you read... Here the ECB tries to explain how they think Monetary Policy works. There are four main channels trough which Monetary Policy works: This paper by Mishkin may be a useful review. All in all, does monetary policy work? I don’t know, but if you look at Europe and at the United States you have a “natural experiment” to answer your question...
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