Question

Why might the Reserve Bank choose to employ a program of quantitative easing or credit easing, rather than employing traditional monetary policy?

Answer 1

This strategy of Quantitative easing was invented by Britain post financial crisis. The situation was that the banks were not issuing new loans, and individuals were continuing to repay the loans that they already took. This means the money was getting destroyed.

Quantitative easing is an unconvnetional monetary policy that a central bank can undertake. In this strategy the central bank invests in Govt bonds and long term investments. This induction of money into the economy results in increase in supply of cash. When there is increase in supple, like any other goods, tit results in reduced interest rates. Reduced interest rates encourage banks to lend at easier terms and people to borrow more and there by invest more, This results in overall economic growth.

Another advantage of QE is that keeping money supply high results in their currency being low and thereby attracting more foreign investments.

Only disadvatage it might have is sometimes it can result in inflation.

On the other hand Open market operations or traditional monetary policy aims to only influence the interest rates. That too for specific securities with specified maturities. QE is a more holistic approach as defined above. That means, traditional monetary policy can be one of the steps in QE process as well