Understanding the functioning of quantitative easing

Quantitative easing consists in the central bank buying financial assets (mainly bonds) from other economic agents and paying by creating money. The effect of quantitative easing on the economy therefore stems from the fact that money replaces bonds in the balance sheets of economic agents other than the central bank. All the effects of quantitative easing are expected to result from this substitution of assets in portfolios. This shows, for example, that: It would have been possible to obtain the same effects as with quantitative easing had governments used very short-term financing (very short-dated treasury bills) to finance fiscal deficit s instead of bond financing. Other economic agents would have held very short-dated treasury bills instead of bonds, which is similar to holding money instead of bonds; If long-term interest rates become very low and if bonds (mainly public-sector bonds) are very liquid, then bonds and money become highly substitutable and quantitative easing has no effect, since economic agents are indifferent whether they hold money or bonds. The situation is different if the central bank buys risky corporate bonds, which are not substitutable with money. Altogether: Very short-term treasury financing is equivalent to quantitative easing; Resuming a quantitative easing programme that targeted government bonds would have no effect today.