ECB Unleashes Quantitative Easing - How does it work?

Politics ♦ Published: January 22, 2015; 15:30 ♦ (Vindobona)

Today, the ECB finally commenced on a large scale sovereign bond-buying programme. The €60bn monthly asset purchases include covered bonds and asset backed securities. Due to the flood of cheap money, the DAX was boosted. The index increased by up to one per cent to a record high of 10,399.67 points. Quantitative easing is a monetary policy where a central bank creates new money electronically to buy financial assets. The aim is to stimulate an economy when standard monetary policy has become ineffective. How does it work?

ECB Unleashes Quantitative Easing - How does it work? / Picture: © Wikipedia / Soerfm

A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.

This differs from the more usual policy of buying or selling short-term government bonds in order to…

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