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Liquidity Effects of Quantitative Easing on Long-Term Interest Rates

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Author Info

  • Signe Krogstrup
  • Samuel Reynard
  • Barbara Sutter

Abstract

This paper argues that the expansion in reserves following recent quantitative easing programs of the Federal Reserve may have affected long-term interest rates through liquidity effects. The data lends some support for liquidity effects, in that reserves were negatively correlated with long-term yields at the zero lower bound. Estimates suggest that between January 2009 and 2011, 10-year US Treasury yields fell 46-85 basis points as a result of liquidity effects. The liquidity effect is separate from the portfolio balance effect of the change in the public supply of Treasury bonds, which is estimated to have reduced yields by another 20 basis points during that period.

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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2012_02/source/working_paper_2012_02.n.pdf
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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2012-02.

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Length: 38 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:snb:snbwpa:2012-02

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Keywords: Quantitative Easing; Reserves; Liquidity Effect; Long-Term Interest Rates; Zero Lower Bound; Monetary Policy; Portfolio Balance;

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References

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  1. Daniel L. Thornton, 2007. "The daily and policy-relevant liquidity effects," Working Papers, Federal Reserve Bank of St. Louis 2007-001, Federal Reserve Bank of St. Louis.
  2. Michael D. Bauer & Glenn D. Rudebusch, 2011. "The signaling channel for Federal Reserve bond purchases," Working Paper Series, Federal Reserve Bank of San Francisco 2011-21, Federal Reserve Bank of San Francisco.
  3. Andrés, Javier & López-Salido, J David & Nelson, Edward, 2004. "Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4336, C.E.P.R. Discussion Papers.
  4. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports, Federal Reserve Bank of New York 441, Federal Reserve Bank of New York.
  5. David B. Gordon & Eric M. Leeper, 1993. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper, Federal Reserve Bank of Atlanta 93-5, Federal Reserve Bank of Atlanta.
  6. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers, Federal Reserve Bank of St. Louis 2010-018, Federal Reserve Bank of St. Louis.
  7. James D. Hamilton & Jing Cynthia Wu, 2011. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," NBER Working Papers 16956, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Duca, John V. & Murphy, Anthony, 2013. "Would a Bagehot style corporate bond backstop have helped counter the Great Recession?," Economics Letters, Elsevier, Elsevier, vol. 119(3), pages 351-353.
  2. Dimitri O. Ledenyov & Viktor O. Ledenyov, 2013. "To the problem of turbulence in quantitative easing transmission channels and transactions network channels at quantitative easing policy implementation by central banks," Papers 1305.5656, arXiv.org, revised May 2013.
  3. Mirkov, Nikola & Sutter, Barbara, 2012. "Central Bank Reserves and the Yield Curve at the ZLB," Working Papers on Finance, University of St. Gallen, School of Finance 1208, University of St. Gallen, School of Finance.

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