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Central Bank Reserves and the Yield Curve at the ZLB

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  • Mirkov, Nikola

    ()

  • Sutter, Barbara

    ()

Abstract

With short term interest rates bounded at zero, monetary policy has aimed at affecting the yield curve at the longer end during the recent years. As the recent literature has shown, the quantitative easing programs conducted by the Federal reserve have significantly lowered long-term yields. This paper adds central bank reserves as a fourth factor to an affine term structure model to estimate the effect of quantitative easing on the yield curve. The cumulative effect on 10-year Treasury securities during the zero lower bound period is estimated to amount to 85 basis points. Of the total effect, one quarter is shown to be due to the liquidity effect and three quarters to the supply effect. To disentangle the two effects, the estimates for the US are compared to estimates for Swiss data because the Swiss national bank did not engage in any government bond purchases.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1208.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1208.

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Length: 43 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:usg:sfwpfi:2012:08

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Related research

Keywords: Yield curve; zero lower bound; liquidity effect; reserves; Bayesian MCMC.;

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  1. Carlo A. Favero & Linlin Niu & Luca Sala, 2007. "Term Structure Forecasting: No-arbitrage Restrictions vs. Large Information Set," Working Papers 318, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Jardet, C. & Monfort, A. & Pegoraro, F., 2009. "No-arbitrage Near-Cointegrated VAR(p) Term Structure Models, Term Premia and GDP Growth," Working papers 234, Banque de France.
  3. Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Giese, Julia V., 2008. "Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model," Economics Discussion Papers 2008-13, Kiel Institute for the World Economy.
  5. Andrew Ang & Sen Dong & Monika Piazzesi, 2007. "No-Arbitrage Taylor Rules," NBER Working Papers 13448, National Bureau of Economic Research, Inc.
  6. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
  7. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  8. Jordan, Bradford D & Jordan, Susan D, 1997. " Special Repo Rates: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 52(5), pages 2051-72, December.
  9. James D. Hamilton & Jing Cynthia Wu, 2012. "Identification and Estimation of Gaussian Affine Term Structure Models," NBER Working Papers 17772, National Bureau of Economic Research, Inc.
  10. Signe Krogstrup & Samuel Reynard & Barbara Sutter, 2012. "Liquidity Effects of Quantitative Easing on Long-Term Interest Rates," Working Papers 2012-02, Swiss National Bank.
  11. Michael D. Bauer, 2011. "Term premia and the news," Working Paper Series 2011-03, Federal Reserve Bank of San Francisco.
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