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This paper presents a new theory of how quantitative easing (QE) and tightening affect liquidity through market segmentation. Through QE, the central bank purchases Treasuries and agency MBS while issuing reserves. In the financial sector, Treasuries and agency MBS are the primary sources of liquidity for non-bank financial institutions that are also the largest investors in corporate bonds and equities, whereas reserves only circulate among commercial banks. Effectively, QE purchases make liquidity more scarce in the non-bank sector and increase the liquidity premium on corporate bonds. In the meantime, commercial banks’ balance sheets are constrained by the demand for deposits, and large reserve injections take up bank balance sheet space and have a crowding-out effect on bank lending. These results are in sharp contrast to the standard theory where the central bank provides ample liquid reserves to the banking system through QE and therefore enhances the availability of liquidity. Finally, I provide empirical evidence to support the model’s key predictions.