Qualitative Easing involves changing the composition of the central bank’s asset portfolio toward riskier or longer-term assets without necessarily changing the overall size of its balance sheet.
The Sterilized Capital Shifting Sequence
[Central Bank Sells Short-Term Bills] ---> Absorbs Liquidity from Financial System
                                                    |
                                                    v
[Purchase Equal Volume of Long Bonds] <-------------+
  - Injects capital into long-term debt markets
  - Total balance sheet size remains unchanged

By selling short-term treasury bills and using the proceeds to purchase long-term sovereign bonds (an intervention known as Operation Twist), the central bank works to flatten the yield curve and lower long-term interest rates while keeping its total balance sheet size stable.
PreviousNext