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The large scale asset purchases had large international effects

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  • Christopher J. Neely

Abstract

The Federal Reserve's large scale asset purchases (LSAP) of agency debt, MBSs and long-term U.S. Treasuries not only reduced long-term U.S. bond yields also significantly reduced long-term foreign bond yields and the spot value of the dollar. These changes were much too large to have been generated by chance and they closely followed LSAP announcement times. These changes in U.S. and foreign bond yields are roughly consistent with a simple portfolio choice model. Likewise, the exchange rate responses to LSAP announcements are roughly consistent with a UIP-PPP based model. The success of the LSAP in reducing long-term interest rates and the value of the dollar shows that central banks are not toothless when short rates hit the zero bound.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-018.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-018

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Keywords: Monetary policy ; Interest rates;

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  1. Alvaro Almeida & Richard Payne & Charles Goodhart, 1997. "The Effects of Macroeconomic News on High Frequency Exchange Rate Behaviour," FMG Discussion Papers dp258, Financial Markets Group.
  2. Taeyoung Doh, 2010. "The efficacy of large-scale asset purchases at the zero lower bound," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-34.
  3. 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.
  4. Johannes C. Stroebel & John B. Taylor, 2009. "Estimated Impact of the Fed’s Mortgage-Backed Securities Purchase Program," NBER Working Papers 15626, National Bureau of Economic Research, Inc.
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  1. What does QE do?
    by chris dillow in Stumbling and Mumbling on 2010-11-07 10:57:05
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