Quantitative and Qualitative Easing

I was introduced to a new economic voice yesterday, that of Willem Buiter of the London School of Economics. As I am not an economist myself and a rather latecoming wallflower at the big party where our time's morbid economic scandals are gossiped about, I depend on the serendipity of the blogosphere to direct my eavesdropping. In this case, it was Yvesdropping, as the tip on Buiter came from Yves Smith at Naked Capitalism.

Yves commented on Buiter's against-the-grain skepticism at the value of a large fiscal stimulus, noting in the process that Buiter is an eminent economist who often bucks orthodoxy. Then Paul Krugman critiqued Buiter's position, while nevertheless acknowledging him as a heavyweight.

In browsing some of Buiter's recent writings on his own blog, I came across one that I found helpful, as it clearly explains what is meant by quantitative and qualitative easing as tools of the central banks.

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.

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.