The Effect of " Quantitative Monetary Easing " When the Nominal Short-term Interest Rate Is Zero A. Decline in Long-term Interest Rates B. Relief from Concern over the Liquidity of Financial Institutions

Any textbook of macroeconomics will tell you that the starting point of the transmission mechanism of monetary policy is a change in reserves and an associated change in short-term interest rates. Reserves can only be provided by a central bank. Therefore, when a central bank increases its provision of reserves, it is certain that short-term interest rates will decline. Changes in short-term interest rates subsequently affect mediumand long-term interest rates, foreign exchange rates, and stock prices, leading to changes in the behavior of economic agents such as financial institutions, firms and households.