Quantative Easing and Tightening steps

Simple QE theory

Central bank creates money
to buy bonds from financial institutions
which reduces interest rates
Leading to more borrowing
so spending increases and jobs are created
to boost the economy

Detailed QE theory

Central bank creates electronic money
Uses this money to buy bonds from financial institutions
Banks have increased liquidity
so encourages lending
Increase in demand for bonds
so increase in bond prices
so creates/improves wealth effect
so decreases bond yields (interest rates)
so increases borrowing
Removes deflationary expectations
so consumption and investment increases
so AD increases
So inflation, output increases, unemployment decreases
Economy is boosted
Central bank sells back bonds and destroys money

QT

Economy is boosted
Central bank sells back bonds and destroys money

What factors may limit the effectiveness of monetary policy in a recession?

If confidence is low, investment/spending may not be significantly encouraged, despite lower interest rates.

Commercial banks may not have the funds to lend, therefore it is still difficult to get bank loans.

Lower interest rates won't help those (homeowners) on fixed interest rates (fixed rate mortgages).

If deflation occurs, it drives up real interest rates and therefore reduces the power of the monetary policy, as interest rates cannot be negative.

Judgement of monetary policy:
Effectiveness depends on...

How serious is the recession?
Is the recession domestic or global?
What is the level of confidence like in the economy?
Elasticity of interest rate changes?
Liquidity trap (people hold cash waiting for interest rates to increase from the current low levels)?