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The effects of Federal Reserve's quantitative easing and balance sheet normalization policies on long-term interest rates

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  • Sophocles N. Brissimis

    (University of Piraeus and Bank of Greece)

  • Evangelia A. Georgiou

    (Bank of Greece and University of Piraeus)

Abstract

This paper develops a macro-finance term structure model based on the expectations hypothesis extended to include a time-varying term premium. The model establishes inter alia the link between quantitative easing and the term premium, allowing us to measure the total impact on the bond yield of all phases of the Fed's unconventional monetary policy implementation, including balance sheet expansion and normalization. Furthermore, by focusing on the long-run behavior of the model, an estimate of the equilibrium real interest rate is derived capturing longer-run macroeconomic trends, including the Fed's, pre-financial crisis, balance-sheet trend.

Suggested Citation

  • Sophocles N. Brissimis & Evangelia A. Georgiou, 2022. "The effects of Federal Reserve's quantitative easing and balance sheet normalization policies on long-term interest rates," Working Papers 299, Bank of Greece.
    • Handle: RePEc:bog:wpaper:299
    DOI: 10.52903/wp2022299
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    Keywords

    Quantitative easing; balance sheet normalization; term structure; time-varying term premium; equilibrium real interest rate;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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