Working Paper: NBER ID: w24122
Authors: Yuriy Gorodnichenko; Walker Ray
Abstract: To understand the effects of large-scale asset purchase programs recently implemented by central banks, we study how markets absorb large demand shocks for risk-free debt. Using high-frequency identification, we exploit the structure of the primary market for U.S. Treasuries to isolate demand shocks. These shocks are sizable, leading to large movements in Treasury yields and impacting corporate borrowing rates. Informed by a preferred habitat model of the term structure, we test for “local” demand effects and find evidence consistent with theoretical predictions. Crucially, this local effect is strongest when financial markets are disrupted. Our estimates are consistent with the view that quantitative easing worked mainly via market segmentation, with a potentially limited role for other channels.
Keywords: No keywords provided
JEL Codes: E43; E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large demand shocks in the treasury market (E41) | significant movements in treasury yields (E43) |
| significant movements in treasury yields (E43) | affect corporate borrowing rates (E43) |
| demand shocks from treasury auctions (E43) | predict yield changes (Q47) |
| QE (E01) | reduce long-term rates (E43) |
| market segmentation (M31) | stronger local demand effects during financial disruptions (F65) |
| QE operates through market segmentation (G19) | effectiveness of QE contingent on market conditions (E44) |