Working Paper: CEPR ID: DP9145
Authors: Stefania Damico; William English; J David López-Salido; Edward Nelson
Abstract: We provide empirical estimates of the effect of large-scale asset purchase (LSAP)-style operations on longer-term U.S. Treasury yields within a framework that nests the alternative theoretical perspectives on LSAPs. As the principal channels through which LSAPs migh tmatter for longer-term interest rates, we concentrate on (i) the scarcity (available local supply) channel associated with the traditional preferred habitat literature, and (ii) the duration channel associated with the general notion of interest rate risk. Wealso clarify LSAPs? role in the broader context of monetary policy strategy, bringing out the connections between purchases of longer-term assets and historical Federal Reserve policy approaches. Our results indicate that the impact of LSAP-style operations on longer-term interest rates is mainly felt on the nominal term-premium component; moreover, within the nominal term premium, it is the real term premium that experiences the greatest response. The estimates suggest that the scarcity and duration channels have both been of considerable importance for the transmission of purchases to longer-term Treasury yields. Finally, by isolating the degree to which scarcity and duration impinge on term premiums, our estimates indicate the direction in which macroeconomic models should develop in order to encompass the transmission channels associated with LSAPs.
Keywords: CUSIP-level data; History of unconventional monetary policy; Large scale asset purchases; Monetary transmission mechanism
JEL Codes: E52; E58; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| purchase of specific maturities (G19) | prices of those maturities (E43) |
| prices of those maturities (E43) | yields of those securities (G12) |
| real term premium (E43) | variations in scarcity and duration (C41) |
| inflation risk premium (E31) | variations in scarcity and duration (C41) |
| LSAP operations (P37) | nominal term premium component of yields (E43) |
| scarcity channel (D39) | nominal term premium component of yields (E43) |
| duration channel (C41) | term premiums across various maturities (E43) |
| removal of duration risk (C41) | term premiums across various maturities (E43) |
| scarcity proxies (D10) | longer-term yields (E43) |
| duration proxies (C41) | longer-term yields (E43) |