Working Paper: NBER ID: w21750
Authors: Robin Greenwood; Samuel Hanson; Dimitri Vayanos
Abstract: We present a model of the yield curve in which the central bank can provide market participants with forward guidance on both future short rates and on future Quantitative Easing (QE) operations, which affect bond supply. Forward guidance on short rates works through the expectations hypothesis, while forward guidance on QE works through expected future bond risk premia. If a QE operation is expected to be undone in the near term, then its announcement will have a hump-shaped effect on the yield and forward-rate curves; otherwise the effect may be increasing with maturity. Humps associated to QE announcements typically occur at maturities longer than those associated to short-rate announcements, even when the effects of the former are expected to last over a shorter horizon. We use our model to re-examine the empirical evidence on QE announcements in the US.
Keywords: No keywords provided
JEL Codes: G12; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Forward guidance on short rates (E43) | Yield curve (E43) |
| Decline in expected short rate (E43) | Instantaneous forward rate (E43) |
| Forward guidance on bond supply (E43) | Bond prices and yields (E43) |
| Central bank announces future purchase of long-term bonds (E52) | Decrease in risk premium (G19) |
| QE announcements (E60) | Hump-shaped effects on longer maturities (C41) |