Quantitative easing and qualitative easing: a terminological and taxonomic proposal

A short post for once!  I propose the following taxonomy for measures the central bank may take, other than changing the official policy rate (the short risk-free nominal interest rate), changing reserve requirements or changing the exchange rate (where this is an instrument of monetary policy).

Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is monetary liabilities (base money), holding constant the composition of its assets.  Asset composition can be defined as the proportional shares of the different financial instruments held by the central bank in the total value of its assets. An almost equivalent definition would be that quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio.

Qualitative easing is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet (and the official policy rate and the rest of the list of usual suspects).  The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments.  All forms of risk, including credit risk (default risk) are included.

The Fed is engaged in aggressive quantitative and qualitative easing.  The Bank of England is engaged in reluctant quantitative and qualitative easing.  The ECB has done less quantitative easing (proportionally) than the Bank of England or the Fed, but has engaged in quite a bit of qualitative easing – not by buying risky and illiquid private securities outright, but by accepting them as collateral in repos and at the discount window (its marginal lending facility).

Before this crisis is over, the two largest European central banks will engage in both quantitative and qualitative easing on a much larger scale.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website