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Quantitative Easingand U.S. Financial Asset Returns

18 Sep 2015-Vol. 2, Iss: 3, pp 76-105

Abstract. This paper is a comprehensive study of the unconventional monetary policy taken by the Federal Reserve since the financial crisis of 2008, specifically on the purchases of different assets by the Fed to change medium and long-term rates.  Included in this study are the three rounds of quantitative easing, and the two rounds of Operation Twist. A study as such is needed in order to examine if the Fed’s purchases of these various long-term assets had any effect on the financial markets in the longer term perspective since the first announcement of the first round of purchase in November 2008. While there exists a variety of literature on the effects of quantitative easing on Treasuries and mortgage backed securities, there is no single study comprising of all the large scale asset purchases by the Fed, covering their effects on all major financial assets. This study is an attempt to fill this void in current literature on quantitative easing. Keywords. Unconventional Monetary Policy, Quantitative Easing, the Federal Reserve. JEL. E52, E58, G14.

Topics: Quantitative easing (65%), Financial asset (61%), Monetary policy (55%), Financial crisis (53%), Financial market (52%) more

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Posted ContentDOI
22 Mar 2003
Abstract: THE CONSEQUENCES FOR THE PROPER conduct of monetary policy of the existence of a lower bound of zero for overnight nominal interest rates has recently become a topic of lively interest. In Japan the call rate (the overnight cash rate analogous to the federal funds rate in the United States) has been within 50 basis points of zero since October 1995, and it has been essentially equal to zero for most of the past four years (figure 1). Thus the Bank of Japan has had little room to further reduce short-term nominal interest rates in all that time. Meanwhile Japan's growth has remained anemic, and prices have continued to fall, suggesting a need for monetary stimulus. Yet the usual remedy--lower short-term nominal interest rates--is plainly unavailable. Vigorous expansion of the monetary base has also seemed to do little to stimulate demand under these circumstances: as figure l also shows, the monetary base is now more than twice as large, relative to GDP, as it was in the early 1990s. [FIGURE 1 OMITTED] In the United States, meanwhile, the federal funds rate has now been reduced to only 1 percent, and signs of recovery remain exceedingly fragile. This has led many to wonder if this country might not also soon find itself in a situation where interest rate policy is no longer available as a tool for macroeconomic stabilization. A number of other countries face similar questions. John Maynard Keynes first raised the question of what can be done to stabilize the economy when it has fallen into a liquidity trap--when interest rates have fallen to a level below which they cannot be driven by further monetary expansion--and whether monetary policy can be effective at all under such circumstances. Long treated as a mere theoretical curiosity, Keynes's question now appears to be one of urgent practical importance, but one with which theorists have become unfamiliar. The question of how policy should be conducted when the zero bound is reached--or when the possibility of reaching it can no longer be ignored--raises many fundamental issues for the theory of monetary policy. Some would argue that awareness of the possibility of hitting the zero bound calls for fundamental changes in the way policy is conducted even before the bound has been reached. For example, Paul Krugman refers to deflation as a "black hole," (1) from which an economy cannot expect to escape once it has entered. A conclusion often drawn from this pessimistic view of the efficacy of monetary policy in a liquidity trap is that it is vital to steer far clear of circumstances in which deflationary expectations could ever begin to develop--for example, by targeting a sufficiently high positive rate of inflation even under normal circumstances. Others are more sanguine about the continuing effectiveness of monetary policy even when the zero bound is reached, For example, it is often argued that deflation need not be a black hole, because monetary policy can affect aggregate spending, and hence inflation, through channels other than central bank control of short-term nominal interest rates. Thus there has been much recent discussion, with respect to both Japan and the United States--of the advantages of vigorous expansion of the monetary base even without any further reduction in interest rates, of the desirability of attempts to shift longer-term interest rates through central bank purchases of longer-maturity government securities, and even of the desirability of central bank purchases of other kinds of assets. Yet if these views are correct, they challenge much of the recent conventional wisdom regarding the conduct of monetary policy, both within central banks and among academic monetary economists. That wisdom has stressed a conception of the problem of monetary policy in terms of the appropriate adjustment of an operating target for overnight interest rates, and the prescriptions formulated for monetary policy, such as the celebrated Taylor rule, (2) are typically cast in these terms. …

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"Quantitative Easingand U.S. Financi..." refers background in this paper

  • ...Recent literature, i.e. Svensson (2001), Eggertsson & Woodford (2003), suggests that additional monetary stimulus such as quantitative easing can be introduced together with some form of commitment to the public to keep short-term interest rate low for a prolonged period of time, even after when…...


Journal ArticleDOI
Abstract: We evaluate the effect of the Federal Reserve's purchase of long-term Treasuries and other long-term bonds (QE1 in 2008-09 and QE2 in 2010-11) on interest rates. Using an event-study methodology, we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target, because quantitative easing works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and a mortgage-backed securities (MBS) prepayment channel and a corporate bond default risk channel for QE1 only. Second, effects on particular assets depend critically on which assets are purchased. The event study suggests that MBS purchases in QE1 were crucial for lowering MBS yields as well as corporate credit risk and thus corporate yields for QE1, and Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and agency bonds relative to MBSs and corporate bonds, with yields on the latter falling primarily through the market's anticipation of lower future federal funds rates.

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"Quantitative Easingand U.S. Financi..." refers background or methods in this paper

  • ...Krishnamurthy and Vissing-Jorgensen (2011) remark on the identification issue for these five QE1 event dates that there is some uncertainty that the identified events are in fact the dominant events for the identified event day....


  • ...For the announcement dates in QE1 and QE2, this paper uses the five dates selected by Krishnamurthy and Vissing-Jorgensen (2011), but also included other QE announcement dates from FOMC up to the most recent time....


  • ...As such, besides running a baseline regression using the event dates from Krishnamurthy & Vissing-Jorgensen (2011), I also performed a robustness check, included all FOMC announcements regarding QE, not just the select, earlier ones that had more impact on the market....


  • ...Krishnamurthy & Vissing-Jorgensen (2011) also raise the issue of omitted event dates and how that would affect their event study....


  • ...Following Gagnon et al (2010) and Krishnamurthy & Vissing-Jorgensen (2011), this paper utilizes an event-study approach to examine the impact of all of the recent large-scale asset purchases based on announcements from the Fed of such purchases, spanning from the first announcement of QE1 on…...