The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy,
NBER Working Paper No. 17555 We evaluate the effect of the Federal Reserve's purchase of long-term Treasuries and other long-term bonds ("QE1" in 2008-2009 and "QE2" in 2010-2011) 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 QE 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 an MBS pre-payment channel and a corporate bond default risk channel for QE1. Second, effects on particular assets depend critically on which assets are purchased. The event-study suggests that (a) mortgage-backed securities purchases in QE1 were crucial for lowering mortgage-backed security yields as well as corporate credit risk and thus corporate yields for QE1, and (b) Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and Agencies relative to mortgage-backed securities and corporates, with yields on the latter falling primarily through the market's anticipation of lower future federal funds rates. This paper is available as PDF (835 K) or via email
Acknowledgments and Disclosures Machine-readable bibliographic record - MARC, RIS, BibTeX Document Object Identifier (DOI): 10.3386/w17555 Published: Brookings Papers on Economic Activity The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy Fall 2011, Annette Vissing-Jorgensen and Arvind Krishnamurthy citation courtesy of |
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