Working Paper: CEPR ID: DP14841
Authors: Jonathan Hartley; Alessandro Rebucci
Abstract: This paper conducts an event study of 30 quantitative easing (QE) announcements made by 21 central banks on daily government bond yields and bilateral US dollar exchange rates in March and April 2020, in the midst of the global financial turmoil triggered by the COVID-19 outbreak. The paper also investigates the transmission of innovations to long-term interest rates in a standard GVAR model estimated with quarterly pre-COVID-19 data. We find that QE has not lost effectiveness in advanced economies and that its international transmission is consistent with the working of long-run uncovered interest rate parity and a large dollar shortage shock during the COVID-19 period. In emerging markets, the QE impact on bond yields is much stronger and its transmission to exchange rates is qualitatively different than in advanced economies. The GVAR evidence that we report illustrates the Fed’s pivotal role in the global transmission of long-term interest rate shocks, but also the ample scope for country-specific interventions to affect local financial market conditions, even after controlling for common factors and spillovers from other countries. The GVAR evidence also shows that QE interventions can have sizable real effects on output driven by a very persistent impact on long-term interest rates.
Keywords: Bond Yields; Central Banks; COVID-19; Event Study; Exchange Rates; GVAR; Monetary Policy; Swap Lines; Quantitative Easing
JEL Codes: E51; E58; G12; G14; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quantitative easing announcements (E60) | bond yields (G12) |
| Quantitative easing announcements (E60) | 10-year government bond yield (E43) |
| Quantitative easing announcements (E60) | cumulative impacts on bond yields (E43) |
| Quantitative easing announcements (E60) | bond yields in emerging markets (G15) |
| Quantitative easing announcements (E60) | cumulative impacts on bond yields in emerging markets (F65) |
| Federal Reserve actions (E52) | global transmission of long-term interest rate shocks (F42) |
| Quantitative easing interventions (E52) | output (C67) |
| long-term interest rates (E43) | real effects on output (E23) |