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Measuring the effects of unconventional monetary policy on asset prices

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  • Eric T. Swanson

Abstract

I adapt the methods of Gürkaynak, Sack, and Swanson (2005) to estimate two dimensions of monetary policy during the 2009–2015 zero lower bound period in the U.S. I show that, after a suitable rotation, these two dimensions can be interpreted as “forward guidance” and “large-scale asset purchases” (LSAPs). I estimate the sizes of the forward guidance and LSAP components of each FOMC announcement between January 2009 and June 2015, and show that those estimates correspond closely to identifiable features of major FOMC announcements over that period. Forward guidance has relatively small effects on the longest-maturity Treasury yields and essentially no effect on corporate bond yields, while LSAPs have large effects on those yields but essentially no effect on short-term Treasuries. Both types of policies have significant effects on medium-term Treasury yields, stock prices, and exchange rates.

Suggested Citation

  • Eric T. Swanson, 2016. "Measuring the effects of unconventional monetary policy on asset prices," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 19(2), pages 78-100, August.
  • Handle: RePEc:chb:bcchec:v:19:y:2016:i:2:p:78-100
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Eric T. Swanson & John C. Williams, 2014. "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates," American Economic Review, American Economic Association, vol. 104(10), pages 3154-3185, October.
    3. Lawrence H. Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
    4. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    5. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
    6. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 677-691, May.
    7. Michael D. Bauer & Glenn D. Rudebusch, 2014. "The Signaling Channel for Federal Reserve Bond Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 233-289, September.
    8. Jonathan H. Wright, 2012. "What does Monetary Policy do to Long‐term Interest Rates at the Zero Lower Bound?," Economic Journal, Royal Economic Society, vol. 122(564), pages 447-466, November.
    9. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    10. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    11. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
    12. Laurence M. Ball, 2014. "The Case for a Long-Run Inflation Target of Four Percent," IMF Working Papers 14/92, International Monetary Fund.
    13. Michael Woodford, 2012. "Methods of policy accommodation at the interest-rate lower bound," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 185-288.
    14. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-631, August.
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    Citations

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    Cited by:

    1. Eksi, Ozan & Tas, Bedri Kamil Onur, 2017. "Unconventional monetary policy and the stock market’s reaction to Federal Reserve policy actions," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 136-147.
    2. Jung, Alexander & Uhlig, Harald, 2019. "Monetary policy shocks and the health of banks," Working Paper Series 2303, European Central Bank.
    3. Joseph E. Gagnon, 2016. "Quantitative Easing: An Underappreciated Success," Policy Briefs PB16-4, Peterson Institute for International Economics.
    4. repec:eee:jbfina:v:97:y:2018:i:c:p:270-282 is not listed on IDEAS
    5. repec:bla:jecsur:v:31:y:2017:i:3:p:678-711 is not listed on IDEAS
    6. Jongrim Ha & Inhwan So, 2017. "Which Monetary Shocks Matter in Small Open Economies? Evidence from SVARs," Working Papers 2017-2, Economic Research Institute, Bank of Korea.
    7. Lakdawala, Aeimit, 2016. "Decomposing the Effects of Monetary Policy Using an External Instruments SVAR," MPRA Paper 78254, University Library of Munich, Germany.
    8. repec:eee:finana:v:52:y:2017:i:c:p:281-291 is not listed on IDEAS
    9. Richhild Moessner & David-Jan Jansen & Jakob de Haan, 2017. "Communication About Future Policy Rates In Theory And Practice: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 678-711, July.
    10. Takaoka, Sumiko & Takahashi, Koji, 2018. "Differential effects of unconventional monetary policy on syndicated loan contracts," MPRA Paper 89342, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • 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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