Qualitative easing

Qualitative easing is a form of monetary policy whereby a central bank reduces the average quality of the assets backing its monetary base.

Qualitative easing could occur, for example, if a central bank were to move from gold being the primary asset backing its monetary base to a collection of assets more heavily composed of government bonds. Qualitative easing occurred in the European Union throughout the early 21st century as the European Central Bank increased its holdings of bonds issued by troubled countries (such as Greece and Italy) which decreased the average quality of the assets backing the Euro.

Quantitative easing
Willem Buiter has proposed a terminology to distinguish quantitative easing, or an expansion of a central bank's balance sheet, from what he terms qualitative easing, or the process of a central bank adding riskier assets onto its balance sheet:

"Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is [sic] 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.

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."

Links

 * The Fed's Dilemma by Philipp Bagus, October 2009
 * Will There Be QE3, QE4, QE5...? by Philipp Bagus, December 2010