It appears to me that QE has been employed after the collapse of housing bubbles - both in Japan in the early nineties and in many other countries around 2008. During a housing bubble there is a high rate of borrowing and when the bubble collapses the rate of borrowing will reduce dramatically and so (in the absence of any central bank intervention) the money supply will start to fall as existing mortgage principal repayments extinguish previously lent out credit... I once saw a video of the former governor of the Bank of England say words to the effect that QE was being used to compensate for this fall but the publishing of this notion seems to be rare as hens teeth. I have never come across an article that concurs with this idea. Indeed you can read many many descriptions of QE (including Wikipedia) that make no mention whatsoever of the idea of money being extinguished by the repayment of loans or that the money supply might fall without QE.

So either:

  • I have just been reading the wrong articles


  • QE is unrelated to any potential fall in the money supply in the absence of intervention

1 Answer 1


It was not the ultimate goal of central banks but it was certainly an intermediate goal.

  1. First, it is well known fact that during recessions money stock tends to fall. Following the stylized facts presented Romer (2014), in between 1959 and 2009, on average during recessions, real money stock (M-2/GDP deflator) contracted by -0.5% (and this was despite that Fed, like most other central banks, generally tries to pursue expansionary monetary policy in recessions).

    The money supply did not contract in every recession though, but this is mainly because Fed generally does not want money supply to contract during recessions which would cause deflation (and that would exacerbate the shock - Great Depression was Great because of the money supply contraction in the US - See discussion in Friedman & Schwartz Monetary History of the US).

    Now again, money supply does not necessarily have to fall in all recessions, but it is likely to contract without central bank intervention during recession (saying so is not controversial).

  2. Quantitative Easing was done not just to prevent decrease but also further increase the money supply. In fact QE is just a variation on the open market operations that central bank traditionally use (besides interest rates) to expand money supply (see Mankiw Macroeconomics pp 96).

    However, you should note that ultimate goal of central banks is not to increase money supply (that is just tool), but rather to increase inflation/prevent deflation and to ultimately stimulate the economy (many central banks have mandate to either keep prices stable - but this is usually defined as some level of small inflation like 2% p.a., and/or to maintain full employment - which is done by expanding money supply during recessions).

  • $\begingroup$ What is the title of the Romer 2014 paper? $\endgroup$
    – Mick
    Commented Aug 22, 2021 at 6:56
  • $\begingroup$ @Mick oh sorry I forgot to add that, it’s not paper but it is a textbook Advanced Macroeconomics, Romer discusses some stylized facts in chapter on business cycles $\endgroup$
    – 1muflon1
    Commented Aug 22, 2021 at 7:20
  • $\begingroup$ Thanks.. but sadly I don't have that textbook. So you are saying that preventing a fall is an "intermediate goal". What I am after is a paper or article which unequivocally and directly states that at least part of the motivation for QE is preventing a fall in the money supply. Or, failing that, at least states that without QE we would expect the money supply to fall. Does the Romer chapter do that? $\endgroup$
    – Mick
    Commented Aug 22, 2021 at 8:49
  • $\begingroup$ @Mick 1. well but I quoted the relevant statistics for you and you can always borrow the textbook from library. Btw this is well known fact in economics if you have other macro textbook you should be able to find it there 2. But you linked video not a paper and in that video they just say it’s their goal but not that it is their ultimate goal, for example if I exercise I will set some goal like to do 50 pushups, but it’s not like I care about doing 50 push-ups I just want to be healthy. I don’t see any indication in that video that they would be claiming that they did it $\endgroup$
    – 1muflon1
    Commented Aug 22, 2021 at 9:01
  • $\begingroup$ For the sake of increasing money supply and nothing else, even in the video the person says they wish to increase lending to real economy which is channel for increasing inflation and stimulating output, to be completely honest from that 2 min video I am not even sure if they talk about contraction of money supply or output because the sentence would work with both of them. To take this and claim that this is some sort of proclamation that ultimate goal of QE was to prevent money supply decrease and not manage business cycle would be extremely uncharitable interpretation $\endgroup$
    – 1muflon1
    Commented Aug 22, 2021 at 9:08

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