The Tax Research glossary seeks to explain the terms used on this blog that refer to more technical aspects of economics, accounting and tax. It recognises that understanding these terms is critical to understanding the economic issues that affect us all the time.
Like the rest of the Tax Research blog, this glossary is written by Richard Murphy unless there is a note to the contrary. It is normative approach and reflects post-Keynesian, heterodox economic opinion with a bias towards modern monetary theory. The fact that many items in that sentence are hyperlinked shows that they are explained in the glossary.
The copyright notices pertaining to the Tax Research blog apply to this glossary.
The glossary is designed to achieve three goals:
- It seeks to provide a short, hopefully straightforward, definition of what a term might mean.
- It then seeks, when appropriate, to explain what the term means within the context in which it is used. This is meant to elaborate the definition to add to understanding.
- It then critiques the term, explaining, if appropriate, what the weaknesses inherent in the term or the situation it describes are. The aim here is to empower the reader to understand the issues behind the nonsense that most professions create around their activity to provide them with a mystique that they rarely deserve and which often hides what they are really up to.
The glossary is not complete. It will grow over time. If you think there are entries that need adding please let me know by emailing glossary@taxresearch.org.uk. Please also feel free to suggest edits. The best way to do this is to copy an entry into Word and then send me a track-changed document indicating the changes that you suggest.
Because of the way in which it is coded this glossary automatically cross refers entries within itself and to the blog that it supports and within the glossary itself but if you think a link is missing please let me know.
Finally, if you like this glossary then you might like to buy me a coffee. It has required the support of a fair few to write it. You can do so here.
Glossary Entries
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Quantitative Easing
Quantitative easing (QE) is a form of unconventional monetary policy.
QE is used by a central bank to control the rate of inflation within the jurisdiction for which it is responsible when being at or near the zero bound prevents a central bank using conventional monetary policy and the control of bank base rate to achieve that goal.
When using quantitative easing a central bank buys the debt or bonds of the government of its jurisdiction (and occasionally commercially issued debt as well) in the open market and then holds those bonds under its ownership.
The objective of QE is to increase the price of government debt issued by the jurisdiction undertaking the exercise by reducing the quantity of that debt available for sale in financial markets, which scarcity inflates their value, which in turn reduces the effective rate of interest paid on it.
The theoretical justification for QE is that reducing the rate of return on government debt supposedly forces investors to seek an adequate return on their funds elsewhere. It is presumed that they will as a result invest them in risker assets, so providing money for investment in private markets. It is in turn presumed that this investment will stimulate growth in the GDP of the jurisdiction.
During the Covid crisis this did not, however, appear to be the motive of central banks using QE. Instead, those central banks appeared to be funding the expenditure of the governments that controlled or owned them during this period[1].
The practical consequence of quantitative easing is to increase the central bank reserve account balances of commercial banks held with the Bank of England, with the increase representing the amount that a central bank has paid to buy back the bonds previously issued by the government that owns or controls it.
Since the central bank reserve accounts held by commercial banks are a significant part of what is termed ‘base money' (see separate entry) the consequence is that QE increases that part of the money supply because the sums paid for the bonds purchased by the central bank inflate these balances, meaning that QE results in, or provides cover to, money creation by a central bank although many central banks appear to deny this, as do almost all politicians since this process proves the existence of what they call the magic money tree.
For a critique of quantitative easing see unconventional monetary policy.
See also the QE process, which is an essential addition to this post.
[1] As the New Economics Foundation has shown, between April 2020 and July 2021 99.5% of UK government deficits were funded by quantitative easing. https://neweconomics.org/2021/10/99-5-of-government-covid-debt-has-been-matched-by-so-called-bank-of-england-money-printing
Quantitative tightening
Quantitative tightening (QT) is an unconventional monetary policy, but is unusual in that it is one that a central bank can use when the constraints of the zero bound do not apply.
QT represents the reversal of the quantitative easing (QE) process. As a consequence, a central bank pursuing a policy of QT will sell back to the financial markets some or all of the bonds that it acquired when undertaking quantitative easing.
QT can be motivated by a desire to:
- Force interest rates upwards. This is done by making more government bonds available to financial markets. That increased availability reduces the price of those bonds. Since the market rate of interest on government bonds is inversely related to their price since the nominal rate on them is fixed for the duration of their life, forcing the price of these bonds down increases the market rate of interest earned on them. This can be used by a central bank to support a policy that keeps market interest rates above those that the market would otherwise settle upon.
- Reduce spending power in the economy by reducing the supply of government-created money in central bank reserve accounts. As a result, QT can be described as an anti-inflationary policy.
- Draw funds away from private sector market-based investments, meaning that QT is likely to reduce growth in GDP.
- Reduce the size of the balance sheet of a central bank, which size is inflated by QE.
The effectiveness of quantitative tightening is as yet largely unknown as only the Bank of England and US Federal Reserve have tried to do it, and then in relatively limited amounts.
For a critique of QT see unconventional monetary policy.
See also the QE process, which is an essential addition to this post.
Quick ratio
The quick ratio is calculated based on the accounts or financial statements of a reporting entity.
It is the ratio of cash or near cash assets within the current assets of the reporting entity to its current liabilities.
The quick ratio is said to indicate the capacity of a reporting entity to make payment of its current liabilities when under financial pressure to do so.
The current ratio is often considered more useful. It is the ratio of current assets to current liabilities. It assumes as a consequence that a longer timescale for the conversion of all current assets into cash is available, including the collection of trade debtors and the sale of stock and work in progress.
