Abstract
We analyze how public asset purchases affect liquidity, risk sharing and intertemporal smoothing in imperfectly competitive financial markets. Even “neutral” policies, such as budget-balanced trades of risk-free debt, affect liquidity and trading efficiency. Public debt purchases worsen liquidity and risk sharing by increasing price impact, while debt sales improve risk sharing but distort intertemporal trade. “Expansionary” quantitative easing policies can thus reduce trading efficiency. We also derive quantity-based trading rules for optimal public portfolio management. These call for policy to equalize weighted measures of public and private price impact.