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The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases

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Author Info

  • Joseph Gagnon

    (Peterson Institutet for International Economics)

  • Matthew Raskin

    (Federal Reserve Bank of New York)

  • Julie Remache

    (Federal Reserve Bank of New York)

  • Brian Sack

    (Federal Reserve Bank of New York)

Abstract

Since December 2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. We present evidence that the purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs. These reductions in interest rates primarily reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 7 (2011)
Issue (Month): 1 (March)
Pages: 3-43

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Handle: RePEc:ijc:ijcjou:y:2011:q:1:a:1

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  1. Viceira, Luis & Campbell, John, 2001. "Who Should Buy Long-Term Bonds?," Scholarly Articles 3128709, Harvard University Department of Economics.
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