DOI•
Quantitative Easingand U.S. Financial Asset Returns
18 Sep 2015-Vol. 2, Iss: 3, pp 76-105
TL;DR: 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 is presented in this article.
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.
References
More filters
Book•
23 Mar 2009TL;DR: In this article, the problem of monetary policy in most major industrial economies is the very short term nominal interest rate, such as the overnight federal funds rate in the case of the United States.
Abstract: THE CONVENTIONAL INSTRUMENT of monetary policy in most major industrial economies is the very short term nominal interest rate, such as the overnight federal funds rate in the case of the United States. The use of this instrument, however, implies a potential problem: Because currency (which pays a nominal interest rate of zero) can be used as a store of value, the short-term nominal interest rate cannot be pushed below zero. Should the nominal rate hit zero, the real short-term interest rate--at that point equal to the negative of prevailing inflation expectations--may be higher than the rate needed to ensure stable prices and the full utilization of resources. Indeed, an unstable dynamic may result if the excessively high real rate leads to downward pressure on costs and prices that, in turn, raises the real short-term interest rate, which depresses activity and prices further, and so on. Japan has suffered from the problems created by the zero lower bound (ZLB) on the nominal interest rate in recent years, and short-term rates in countries such as the United States and Switzerland have also come uncomfortably close to zero. As a consequence, the problems of conducting monetary policy when interest rates approach zero have elicited considerable attention from the economics profession. Some contributions have framed the problem in a formal general equilibrium setting; another strand of the literature identifies and discusses the policy options available to central banks when the zero bound is binding. (1) Although there have been quite a few theoretical analyses of alternative monetary policy strategies at the ZLB, systematic empirical evidence on the potential efficacy of alternative policies is scant. Knowing whether the proposed alternative strategies would work in practice is important to central bankers, not only because such knowledge would help guide policymaking in extremis, but also because the central bank's choice of its long-run inflation objective depends importantly on the perceived risks created by the ZLB. The greater the confidence of central bankers that tools exist to help the economy escape the ZLB, the less need there is to maintain an inflation "buffer," and hence the lower the inflation objective can be. (2) This paper uses the methods of modern empirical finance to assess the potential effectiveness of so-called nonstandard monetary policies at the zero bound. We are interested particularly in whether such policies would work in modern industrial economies (as opposed to, for example, the same economies during the Depression era), and so our focus is on the recent experience of the United States and Japan. The paper begins by noting that, although the recent improvement in the global economy and the receding of near-term deflation risks may have reduced the salience of the ZLB today, this constraint is likely to continue to trouble central bankers for the foreseeable future. Central banks in the industrial world have exhibited a strong commitment to keeping inflation low, but inflation can be difficult to predict. Although low inflation has many benefits, it also raises the risk that adverse shocks will drive interest rates to the ZLB. Whether hitting the ZLB presents a minor annoyance or a major risk for monetary policy depends on the effectiveness of the policy alternatives available when prices are declining. Following a recent paper by two of the present authors, (3) we group these policy alternatives into three classes: using communications policies to shape public expectations about the future course of interest rates; increasing the size of the central bank's balance sheet; and changing the composition of the central bank's balance sheet. We discuss how these policies might work, and we cite existing evidence on their utility from historical episodes and recent empirical research. The paper's main contribution is to provide new empirical evidence on the possible effectiveness of these alternative policies. …
574 citations
TL;DR: In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities, which led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs.
Abstract: Since December 2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. We present evidence that the purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs. These reductions in interest rates primarily reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.
518 citations
TL;DR: In this paper, the authors empirically investigated price discovery in the market for U.S. equity indexes and found that most of the price discovery occurs in the E-mini market.
Abstract: The market for U.S. equity indexes presently comprises floor-traded index futures contracts, exchange-traded funds (ETFs), electronically traded, small-denomination futures contracts (E-minis), and sector ETFs that decompose the S&P 500 index into component industry portfolios. This paper empirically investigates price discovery in this environment. For the S&P 500 and Nasdaq-100 indexes, most of the price discovery occurs in the E-mini market. For the S&P 400 MidCap index, price discovery is shared between the regular futures contract and the ETF. The S&P 500 ETF contributes markedly to price discovery in the sector ETFs, but there are only minor effects in the reverse direction
384 citations
TL;DR: The authors analyzes the joint behavior of international capital flows by foreign and domestic agents - gross capital flows - over the business cycle and during financial crises and finds that gross capital flow is very large and volatile, especially relative to net capital flow.
Abstract: This paper analyzes the joint behavior of international capital flows by foreign and domestic agents - gross capital flows - over the business cycle and during financial crises. We show that gross capital flows are very large and volatile, especially relative to net capital flows. When foreigners invest in a country, domestic agents tend to invest abroad, and vice versa. Gross capital flows are also pro-cyclical, with foreigners investing more in the country and domestic agents investing more abroad during expansions. During crises, especially during severe ones, there is retrenchment, that is, a reduction in both capital inflows by foreigners and capital outflows by domestic agents. This evidence sheds light on the nature of shocks driving capital flows and helps discriminate among existing theories. Our findings seem consistent with shocks that affect foreign and domestic agents asymmetrically, such as sovereign risk and asymmetric information.
375 citations
Posted Content•
TL;DR: In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities, which led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs.
Abstract: Since December 2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. We present evidence that the purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs. These reductions in interest rates primarily reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.
373 citations