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Expectations of large-scale asset purchases

  • Foerster, Andrew

    (Federal Reserve Bank of Kansas City)

  • Cao, Guangye

    (Federal Reserve Bank of Kansas City)

During and after the recent financial crisis, the Federal Reserve turned to a number of unconventional tools to bolster the economy. The effectiveness of one such tool, large-scale asset purchases (LSAPs)—often referred to as quantitative easing—has been hard to measure. ; Efforts to estimate LSAP impact have often relied on an "event study" approach, focusing on short time intervals around the announcements of new LSAP programs. But these studies typically ignore the fact that financial market participants sometimes expect a given LSAP announcement in advance—and such expectations can affect interest rates prior to the time interval considered. ; Authors Foerster and Cao present evidence that LSAP announcements were often at least partially expected in advance, and they argue that event studies, by ignoring the effects of prior expectations, likely misestimate the impact of LSAPs.

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File URL: http://www.kansascityfed.org/publicat/econrev/pdf/13q2Foerster-Cao.pdf
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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2013)
Issue (Month): Q II ()
Pages: 5-29

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Handle: RePEc:fip:fedker:y:2013:i:qii:n:v.98no.2:x:3
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  1. 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.
  2. Eric T. Swanson, 2011. "Let’s twist again: a high-frequency event-study analysis of operation twist and its implications for QE2," Working Paper Series 2011-08, Federal Reserve Bank of San Francisco.
  3. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, 02.
  4. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  5. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 215-287.
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