Macroeconomic effects and transmission channels of quantitative easing

While for major central banks, quantitative easing (QE) has become as important monetary policy instrument as the policy rate, the empirical literature says little about how QE transmits to the real economy or whether it matters what assets are being purchased. This paper addresses these issues by estimating a larger vector autoregressive model than in the previous literature, which allows for assessing the relative importance of transmission channels of QE and distinguishing between various assets purchased by the Fed. It is found that QE reduces unemployment, which happens mostly via an increase in stock prices and a decline in stock market volatility rather than a fall in long-term interest rates, with Treasury purchases being more effective than purchases of mortgage-backed securities. These findings suggest that QE works mostly by reducing risk premium and thus it is likely to be effective only in countries with deep capital markets.