KATHMANDU, JUNE 29
Quantitative easing (QE) is an unconventional monetary policy, which usually involves a country's central bank purchasing longer-term government bonds, as well as other types of assets, such as mortgage-backed securities.
By buying these financial assets from the banks, the government can increase the quantity of money banks have available to lend in the form of subsidies to the poor and other transfer payments, such as unemployment benefits.
Buying these securities adds new capital funds to the economy and serves to lower the interest rates and improve the domestic fiscal resource to recover from a slump or depression.
As we all are well versed with the trough that this pandemic is leading us to, QE could be a way to stabilise the downward curve.
When firms are running out of money, the easiest way is to dismiss the labourers to reduce expenses. The government requires finance, and this is one of the most sustainable ways for the government to allocate money for the poor people.
Many countries previously used this method to boost activity in their economies following the global financial crisis in 2008 and the deep economic recession that followed.
Families in the rural areas are heavily dependent on the remittance that the migrant labourers send back home. But a recent World Bank Report has indicated that remittances to Nepal are projected to decline by 14 per cent in 2020. The coronavirus-related global slowdown and restrictions have begun impacting movement once again. The International Labour Organisation (ILO) has stated that subsidies are the only way out.
Raising funds is an option, but a lot of people who are willing and able to donate are also suffering huge losses because of the recession.
Should quantitative easing lose effectiveness, the government's fiscal policy may also be used to further expand the money supply. For example, a government purchases assets that consist of long-term government bonds that are issued in order to finance counter-cyclical deficit spending.
There is no guarantee that the QE will always work as envisaged.
Following the Asian Financial Crisis of 1997, Japan fell into an economic recession.
Starting in 2001, the Bank of Japan began an aggressive quantitative easing programme, buying government bonds and private debts and stocks, to curb deflation and to stimulate the economy.
However, the programme failed to meet its goals. Between 1995 and 2007, the Japanese GDP fell from roughly $5.45 trillion to $4.52 trillion in nominal terms. So it is wise to prepare for a worst case scenario.
A version of this article appears in the print on June 30 2021, of The Himalayan Times.