Central bankers are talking about ending their quantitative easing programs as an anti-inflationary strategy while governments are withdrawing of fiscal stimulus programs. Both policy shifts will destroy net financial assets in the non-government sector.
Answer: False
The answer is False.
Quantitative easing involves the central bank buying assets from the private sector - government bonds and high quality corporate debt.
So what the central bank is doing is swapping financial assets with the banks - they sell their financial assets and receive back extra reserves in return.
So the central bank is buying one type of financial asset (private holdings of bonds, company paper) and exchanging it for another (reserve balances at the central bank).
The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.
In terms of changing portfolio compositions, quantitative easing increases central bank demand for 'long maturity' assets held in the private sector which reduces interest rates at the longer end of the yield curve.
A reversal of the policy could take several forms.
(a) Refraining from additional purchases and allowing the government to pay out the debt - no impact on net financial assets in the non-government sector.
(b) Selling the bonds back to the private market, thus swapping bonds for reserves (the reverse of the original bond purchase).
Only the fiscal shift will impact on the net financial assets in the non-government sector.
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