If I lend money to the government, they issue me a bond with the agreement that they will pay me interest and when the bond matures they will give me back the money I have invested.
When central banks trigger QE and bond buying program to inject liquidity in the system, what exactly does this mean? What exactly do they buy?
Does this newly created money fund the maturing bonds in order to return the invested money?
The central bank creates money and uses it to buy government bonds. This increases the amount of money in circulation. They do this when they feel there is too little money in circulation. (Interest rates are higher than they want.)
When they feel there is too much money in circulation, they sell bonds and retire the money. This removes money from circulation and causes interest rates to rise.
By doing this they can exert some influence on the strength of the economy and attempt to speed it up when it is too low and lower it when it is too high.
