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In response to the intensification of the financial crisis in Autumn 2008, the Bank of England, in common with other central banks, loosened monetary policy using both conventional and unconventional policy measures. In the United Kingdom, the principal element of these unconventional measures was the policy of asset purchases financed by central bank money, so-called quantitative easing (QE). Over the period March 2009 to January 2010, £200 billion of assets were purchased, overwhelmingly made up of government securities, representing around 14% of annual GDP. This article reviews the motivation for these central bank asset purchases and describes how they were implemented. It goes on to review a range of evidence for the impact of the asset purchases made to date, both on financial markets and more widely on the economy. While there is considerable uncertainty about the magnitudes, the evidence suggests that QE asset purchases have had economically significant effects.
Introduction
After the failure of Lehman Brothers in September 2008, confidence in the world economy collapsed, international financial markets became dysfunctional and credit conditions tightened markedly.
As the crisis intensified, central banks internationally took measures to loosen monetary policy and support demand. In the United Kingdom, the Bank of England's Monetary Policy Committee (MPC) cut interest rates sharply, with cuts of 3 percentage points in Bank Rate during 2008 Q4 and a further 1 ½ percentage points in early 2009. In early March 2009, Bank Rate was reduced to Vz0Zo1 effectively its lower bound. But, despite this substantial loosening in policy, the MPC judged that without additional measures nominal spending would be too weak to meet the 2% CPI inflation target in the medium term. The MPC therefore also announced that it would begin a programme of large-scale purchases of public and private assets using central bank money. (2) The aim of the policy was to inject money into the economy in order to boost nominal spending and thus help achieve the 2% inflation target.
The policy of expanding the central bank's balance sheet through asset purchases, financed by central bank money is widely referred to as quantitative easing (QE).(3) The Bank of England's asset purchases were overwhelmingly focused on purchasing a large amount of UK government bonds (gilts). Between March 2009 and January...