With cheaper borrowing the hope is that the central bank will again encourage greater spending, putting additional demand into the economy and pulling it out of recession. As the money ends up in bank deposits, banks should also find their funding position improved and make them more willing to lend.
A side effect will be that this new money is expected to raise consumer prices giving people another incentive to buy now rather than later.
Of course there are risks. First, a central bank can lose money on its purchases, money that will ultimately have to be underwritten by taxpayers either with higher future taxation or by the central bank creating more money and risking higher future inflation. Second, go too far with creating and spending money and you will destroy the value of the currency. Inflation or even hyperinflation is the result. Third, if a descent into QE destroys confidence in an economy rather than gives reassurance that the authorities are on the case it can be counter-productive.
That is why central banks cannot use QE willy-nilly, but if you are not aggressive enough QE simply will not work to change other interest rates in the economy and stimulate demand. The trouble is, because the policy is unorthodox and the situation is dramatic no one knows how much QE is too much and how much is not enough. Who would be a central banker at the moment? [1]
Financial Times. (2015). Definition of Quantitative Easing. Retrieved 2015, April 12 from http://lexicon.ft.com/Term?term=quantitative-easing’
http://theeconomiccollapseblog.com/archives/9-reasons-why-quantitative-easing-is-bad-for-the-u-s-economy
So did quantitative easing work then?
No, not really. It may have helped stabilize the economy in the short-term, but unemployment is still staggeringly high. Monthly U.S. home sales continue to come in at close to record low levels. Businesses are borrowing less money. Individuals are borrowing less money. Stores...