If this premise holds, then large increases in the money supply will lead investors to seek to rebalance their portfolios, raising prices and reducing yields on alternative, non-money assets. Lower yields on long-term assets will in turn stimulate economic activity.
The possibility that monetary policy works through portfolio substitution effects, even in normal times, has a long intellectual history, having been espoused by both Keynesians (Tobin, 1969) and monetarists (Brunner and Meltzer, 1973). Recently, Javier Andres, J. David Lopez-Salido, and Edward Nelson (2003) have shown how these effects might work in a general equilibrium model with optimizing agents.