Abstract This paper develops a dynamic general equilibrium model to study quantitative easing (QE) and direct lending to firms. QE works through three channels: expanding bank reserves raises liquidity and lowers the liquidity premium, purchasing assets withdraws risk and lowers the volatility risk premium, and the resulting economic stimulus lowers the credit risk premium. When bank reserves are higher, the liquidity premium channel is weaker, and QE is less expansionary. Direct lending is more expansionary than QE because it substitutes bank lending and mitigates the credit risk frictions associated with bank lending, while QE stimulates bank lending and worsens the frictions.