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The impact of quantitative easing on the US term structure of interest rates

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  • Robert Jarrow

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  • Hao Li

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Abstract

This paper estimates the impact of the Federal Reserve’s 2008–2011 quantitative easing (QE) program on the US term structure of interest rates. We estimate an arbitrage-free term structure model that explicitly includes the quantity impact of the Fed’s trades on Treasury market prices. As such, we are able to estimate both the magnitude and duration of the QE price effects. We show that the Fed’s QE program affected forward rates without introducing arbitrage opportunities into the Treasury security markets. Short- to medium- term forward rates were reduced ( $$>$$ > 12 years), but the QE had little if any impact on long-term forward rates. This is in contrast to the Fed’s stated intentions for the QE program. The persistence of the rate impacts increased with maturity up to 6 years then declined, with half-lives lasting approximately 4, 6, 12, 8 and 4 months for the 1, 2, 5, 10 and 12 years forwards, respectively. Since bond yields are averages of forward rates over a bond’s maturity, QE affected long-term bond yields. The average impacts on bond yields were 327, 26, 50, 70, and 76 basis points for 1, 2, 5, 10 and 30 years, respectively. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Robert Jarrow & Hao Li, 2014. "The impact of quantitative easing on the US term structure of interest rates," Review of Derivatives Research, Springer, vol. 17(3), pages 287-321, October.
  • Handle: RePEc:kap:revdev:v:17:y:2014:i:3:p:287-321
    DOI: 10.1007/s11147-014-9099-7
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    References listed on IDEAS

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    Cited by:

    1. Jiří Štekláč & Miroslav Titze, 2016. "Udržitelnost dluhového financování státu a její interakce s kvantitativním uvolňováním: případ USA, UK a Japonska v letech 2000-2014
      [Government Debt Financing Sustainability and Its Interaction wi
      ," Politická ekonomie, University of Economics, Prague, vol. 2016(3), pages 293-318.
    2. Barroso, João Barata R.B. & da Silva, Luiz A. Pereira & Sales, Adriana Soares, 2016. "Quantitative easing and related capital flows into Brazil: Measuring its effects and transmission channels through a rigorous counterfactual evaluation," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 102-122.
    3. repec:kap:apfinm:v:25:y:2018:i:1:d:10.1007_s10690-018-9238-5 is not listed on IDEAS
    4. repec:taf:oaefxx:v:5:y:2017:i:1:p:1343017 is not listed on IDEAS

    More about this item

    Keywords

    Quantitative easing; The term structure of interest rates; Arbitrage-free models; Large trader; Quantity impact on price; G12; E43; E44; E52; E58;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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