Definitions
Willem Buiter defines quantitative easing as follows:
"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."
He defines qualitative easing:
"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."
Other economists operate with similar definitions (see here, and here).
I do not find this approach very concinving. I define quantitative easing as any increase in the size of the balance sheet and qualitative easing as a deterioration of the average quality of assets backing a central bank´s liabilities.
Why do I prefer this approach?
The essential concept is the quality of money, i.e. the capacity of money to fulfill its functions. For the quality of money the average quality of the assets of a central bank is more important than the size of the balance sheet. Most importantly, the average quality of assets may change not only holding constant the size of the balance sheet as Buiter says, but also when the balance sheet shrinks or increases. Moreover, not every increase in the balance sheet of the central bank is bad for the quality of the currency. Shrinking the balance sheet may also imply a deterioration of the quality of the currency.
Imagine some examples:
1. The FED buys subprime mortgages or Simbabvian Dollars and increases the size of its balance. This is qualitaty easing as the average quality of assets backing the liabilities falls.
2. The FED buy gold increasing its balance sheet. This is not qualitative easing but, in fact, a qualitative improvement. The average quality of its assets increases (the gold reserve ratio rises).
3. The FED sells gold reducing its balance sheet. This is qualitative easing, because the percentage of mortgage backes securities in its assets increases and the gold reserve ratio falls.
4. The FED sells MBS reducing its balance sheet. This is a qualitative improvement, because the gold reserve ratio increases and the portion of low quality asset in reduced.
5. The FED holds its balance sheet constant, buying Simbabwe Dollars and selling all its gold. This is qualitative easing (the only one Buiter can see through his definitional lenses). Qualitative easing implies a deterioration of the quality of a currency. In this case the dollar´s value and purchasing power is likely to collapse, even though the quantity of money did not change at all.
In sum, quantitative easing may be qualitative easing or improving depending on the quality of the assets bought. The average quality of a CB´s assets are important at any time (shrinking, increasing balance sheet), not only when the size of the balance sheet is constant.
Please inform me about article on qualitative easing!
"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."
He defines qualitative easing:
"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."
Other economists operate with similar definitions (see here, and here).
I do not find this approach very concinving. I define quantitative easing as any increase in the size of the balance sheet and qualitative easing as a deterioration of the average quality of assets backing a central bank´s liabilities.
Why do I prefer this approach?
The essential concept is the quality of money, i.e. the capacity of money to fulfill its functions. For the quality of money the average quality of the assets of a central bank is more important than the size of the balance sheet. Most importantly, the average quality of assets may change not only holding constant the size of the balance sheet as Buiter says, but also when the balance sheet shrinks or increases. Moreover, not every increase in the balance sheet of the central bank is bad for the quality of the currency. Shrinking the balance sheet may also imply a deterioration of the quality of the currency.
Imagine some examples:
1. The FED buys subprime mortgages or Simbabvian Dollars and increases the size of its balance. This is qualitaty easing as the average quality of assets backing the liabilities falls.
2. The FED buy gold increasing its balance sheet. This is not qualitative easing but, in fact, a qualitative improvement. The average quality of its assets increases (the gold reserve ratio rises).
3. The FED sells gold reducing its balance sheet. This is qualitative easing, because the percentage of mortgage backes securities in its assets increases and the gold reserve ratio falls.
4. The FED sells MBS reducing its balance sheet. This is a qualitative improvement, because the gold reserve ratio increases and the portion of low quality asset in reduced.
5. The FED holds its balance sheet constant, buying Simbabwe Dollars and selling all its gold. This is qualitative easing (the only one Buiter can see through his definitional lenses). Qualitative easing implies a deterioration of the quality of a currency. In this case the dollar´s value and purchasing power is likely to collapse, even though the quantity of money did not change at all.
In sum, quantitative easing may be qualitative easing or improving depending on the quality of the assets bought. The average quality of a CB´s assets are important at any time (shrinking, increasing balance sheet), not only when the size of the balance sheet is constant.
Please inform me about article on qualitative easing!
