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The response of interest rates to U.S. and U.K. quantitative easing

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  • Jens H.E. Christensen
  • Glenn D. Rudebusch

Abstract

We analyze the declines in government bond yields that followed the announcements of plans by the Federal Reserve and the Bank of England to buy longer-term government debt. Using empirical dynamic term structure models, we decompose these declines into changes in expectations about future monetary policy and changes in term premiums. We find that declines in U.S. Treasury yields mainly reflected lower policy expectations, while declines in U.K. yields appeared to reflect reduced term premiums. Thus, the relative importance of the signaling and portfolio balance channels of quantitative easing may depend on market institutional structures and central bank communications policies.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2012-06.

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Date of creation: 2012
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Handle: RePEc:fip:fedfwp:2012-06

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Keywords: Monetary policy;

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  1. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, 09.
  2. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2009. "Do central bank liquidity facilities affect interbank lending rates?," Working Paper Series 2009-13, Federal Reserve Bank of San Francisco.
  3. Michael D. Bauer & Glenn D. Rudebusch, 2011. "The signaling channel for Federal Reserve bond purchases," Working Paper Series 2011-21, Federal Reserve Bank of San Francisco.
  4. Eric T. Swanson & John C. Williams, 2012. "Measuring the effect of the zero lower bound on medium- and longer-term interest rates," Working Paper Series 2012-02, Federal Reserve Bank of San Francisco.
  5. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports 441, Federal Reserve Bank of New York.
  6. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  7. Glenn Rudebusch & Eric Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Series 2008-31, Federal Reserve Bank of San Francisco.
  8. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
  9. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
  10. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2012. "Correcting Estimation Bias in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(3), pages 454-467, April.
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Citations

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Cited by:
  1. Michael D. Bauer & Christopher J. Neely, 2012. "International channels of the Fed’s unconventional monetary policy," Working Papers 2012-028, Federal Reserve Bank of St. Louis.
  2. Kazuo Ueda, 2011. "Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007," CIRJE F-Series CIRJE-F-828, CIRJE, Faculty of Economics, University of Tokyo.
  3. Burns, Andrew & Kida, Mizuho & Lim, Jamus Jerome & Mohapatra, Sanket & Stocker, Marc, 2014. "Unconventional monetary policy normalization in high-income countries : implications for emerging market capital flows and crisis risks," Policy Research Working Paper Series 6830, The World Bank.
  4. Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2014. "Can spanned term structure factors drive stochastic yield volatility?," Working Paper Series 2014-3, Federal Reserve Bank of San Francisco.
  5. Matteo Falagiarda & Stefan Reitz, 2013. "Announcements of ECB Unconventional Programs: Implications for the Sovereign Risk of Italy," Kiel Working Papers 1866, Kiel Institute for the World Economy.
  6. Kettemann, Andreas & Krogstrup, Signe, 2014. "Portfolio balance effects of the Swiss National Bank’s bond purchase program," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 132-149.
  7. Jens H. E. Christensen & James M. Gillan, 2013. "Does quantitative easing affect market liquidity?," Working Paper Series 2013-26, Federal Reserve Bank of San Francisco.
  8. Jens H.E. Christensen & Glenn D. Rudebusch, 2013. "Estimating shadow-rate term structure models with near-zero yields," Working Paper Series 2013-07, Federal Reserve Bank of San Francisco.
  9. Falagiarda, Matteo, 2013. "Evaluating Quantitative Easing: A DSGE Approach," MPRA Paper 49457, University Library of Munich, Germany.
  10. Song, Zhaogang & Zhu, Haoxiang, 2014. "QE Auctions of Treasury Bonds," Finance and Economics Discussion Series 2014-48, Board of Governors of the Federal Reserve System (U.S.).
  11. Jens H.E. Christensen, 2013. "A regime-switching model of the yield curve at the zero bound," Working Paper Series 2013-34, Federal Reserve Bank of San Francisco.
  12. Christensen, Jens H.E. & Rudebusch, Glenn D., 2013. "Modeling yields at the zero lower bound: are shadow rates the solution?," Working Paper Series 2013-39, Federal Reserve Bank of San Francisco.
  13. Andreas Kettemann & Signe Krogstrup, 2013. "Portfolio balance effects of the SNB's bond purchase program," Working Papers 2013-01, Swiss National Bank.
  14. Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2013. "A probability-based stress test of Federal Reserve assets and income," Working Paper Series 2013-38, Federal Reserve Bank of San Francisco.
  15. Timothy Sharpe & Martin Watts, 2013. "Unconventional Monetary Policy in the UK: A Modern Money Critique," Economic Issues Journal Articles, Economic Issues, vol. 18(2), pages 41-64, September.
  16. Putnam, Bluford H., 2013. "Essential concepts necessary to consider when evaluating the efficacy of quantitative easing," Review of Financial Economics, Elsevier, vol. 22(1), pages 1-7.

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