This paper presents a novel decomposition of the transmission of quantitative easing (QE) into two distinct channels: the Liquidity channel, which involves injecting liquidity into the market, and the Interest Rate channel, which concerns the manipulation of the term structure of interest rates. Using a general equilibrium model that includes household heterogeneity and financial frictions, I show how these elements affect the effectiveness of QE by asymmetrically altering the strength of these two channels. After quantitatively solving and calibrating the model, my findings indicate that the liquidity channel's contribution to QE's stimulative impact on output is approximately 1.50 times greater than that of the interest rate channel. Additionally, the interplay between household heterogeneity and financial friction is crucial in determining the effect of QE, rather than one factor alone. Finally, I empirically validate these channels by introducing a novel instrumental variable and an identification methodology within a Bayesian-IV-VAR framework. The empirical evidence aligns with the quantitative findings, revealing that the liquidity channel is 1.46 times more effective than the interest rate channel.

In this paper, I unveil a novel mechanism through which a housing market boom can lead to a deep recession by decreasing physical investment and rendering capital scarce. This inefficiency arises from a crowding-out effect: the available liquidity, which could otherwise be channeled into firms' capital investments (e.g., factories, equipment, R&D), is redirected toward the residential sector during a housing boom. The crowded-out physical investment subsequently amplifies the losses of the bust and prolongs the duration of the recession by making the physical capital stock limited at the onset of the bust. Using a novel identification method of a shock that generates housing boom-bust cycles in a structural vector regression model, this paper empirically documents that a 2% jump in housing prices can crowd out 1% of physical investment at the peak. Then, I develop a heterogeneous household model to quantify the welfare effects of this novel mechanism. I show that the crowding-out effect can account for up to 13% of the welfare losses during the recession period. Finally, I illustrate that a macroprudential policy curbing the overheated housing market can significantly mitigate the crowding-out effect and welfare losses.

In this paper, I document two opposite channels that the Quantitative Easing (QE) can influence the wealth inequality in Unite States. On the one hand, an economic recovery, facilitated by QE, serves to reduce inequality through general equilibrium effects and labor market dynamics by elevating the lower-income cohorts to middle-class status (MPC channel). On the other hand, diminished returns on financial assets have a regressive effect, demoting middle-class households to lower income levels (MPS channel). The net impact of QE on wealth inequality, therefore, is contingent upon the relative strengths of these opposing forces. Then, by setting up a general equilibrium model with heterogeneous household and financial frictions, I demonstrate that the MPC channel overwhelms the MPS channel and the QE increases wealth inequality significantly. Meanwhile, I further show that the macroprudential policy can attenuate the exacerbation of inequality notably.