Working Paper: NBER ID: w22581
Authors: Michael Bordo; Arunima Sinha
Abstract: We examine the first QE program through the lens of an open-market operation under taken by the Federal Reserve in 1932, at the height of the Great Depression. This program entailed large purchases of medium- and long-term securities over a four-month period. There were no prior announcements about the size or composition of the operation, how long it would be put in place, and the program ended abruptly. We use the narrative record to conduct an event study analysis of the operation using the weekly-level Treasury holdings of the Federal Reserve in 1932, and the daily term structure of yields obtained from newspaper quotes. The event study indicates that the 1932 program dramatically lowered medium- and long-term Treasury yields; the declines in Treasury Notes and Bonds around the start of the operation were as large as 114 and 42 basis points respectively. We then use a segmented markets model to analyze the channel through which the open-market purchases affected the economy, namely the portfolio composition and signaling effects. Quarterly data from 1920-32 is used to estimate the model with Bayesian methods. We find that the significant degree of financial market segmentation in this period made the historical open market purchase operation more effective than QE in stimulating output growth. Had the Federal Reserve continued its operations and used the announcement strategy of the QE operation, the Great Contraction could have been attenuated earlier.
Keywords: Quantitative Easing; Open Market Operations; Great Depression; Federal Reserve; Monetary Policy
JEL Codes: E5; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high degree of financial market segmentation (G19) | effectiveness of the 1932 operation (E65) |
| continuation of Federal Reserve purchases with forward guidance strategy (E52) | mitigation of economic contraction (E69) |
| 1932 open market operation (E58) | lowering medium and long-term treasury yields (E43) |
| lowering medium and long-term treasury yields (E43) | stimulating output growth (O49) |