Working Paper: NBER ID: w17555
Authors: Arvind Krishnamurthy; Annette Vissing-Jorgensen
Abstract: 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.
Keywords: Quantitative Easing; Interest Rates; Monetary Policy; Federal Reserve
JEL Codes: E4; E5; G01; G14; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| QE (E01) | medium and long-term interest rates (E43) |
| signaling channel (L96) | yields on all bonds (G12) |
| MBS purchases during QE1 (E51) | MBS yields (E43) |
| QE2 (Y10) | treasury yields (E43) |
| QE1 (F36) | corporate credit risk (G32) |
| default risk premiums for corporate bonds (G33) | QE1 (F36) |
| QE (E01) | liquidity among investors (G19) |
| QE (E01) | yield spreads between different asset classes (G12) |
| QE (E01) | inflation expectations (E31) |
| inflation expectations (E31) | real rates (E43) |