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Unbundling quantitative easing: taking a cue from treasury auctions

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  • Ray, Walker
  • Droste, Michael
  • Gorodnichenko, Yuriy

Abstract

We study the role of preferred habitat in understanding the economic effects of the Federal Reserve’s quantitative easing (QE). Using high-frequency identification and exploiting the structure of the primary market for US Treasuries, we isolate demand shocks that are transmitted solely through preferred habitat channels but otherwise mimic QE shocks. We document large localized yield curve effects when financial markets are disrupted. Our calibrated model, which embeds preferred habitat in a New Keynesian framework, can largely account for the observed financial effects of QE. QE is modestly stimulative for output and inflation, but alternative policy designs can generate stronger effects.

Suggested Citation

  • Ray, Walker & Droste, Michael & Gorodnichenko, Yuriy, 2024. "Unbundling quantitative easing: taking a cue from treasury auctions," LSE Research Online Documents on Economics 120833, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:120833
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    Cited by:

    1. Taiga Saito & Akihiko Takahashi, 2025. "Super-Long Discount Rates for Insurers in Incomplete Markets with Bond Supply Control," CARF F-Series CARF-F-599, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Mar 2025.
    2. Michael Joyce & Andras Lengyel, 2024. "The yield curve impact of government debt issuance surprises and the implications for QT," Bank of England working papers 1097, Bank of England.
    3. Iryna Kaminska & Alex Kontoghiorghes & Walker Ray, 2025. "QT versus QE: who is in when the central bank is out?," Bank of England working papers 1108, Bank of England.
    4. Matthieu Bellon & Matthias Gnewuch, 2024. "Dangerous liaisons? Debt supply and convenience yield spillovers in the euro area," Working Papers 63, European Stability Mechanism, revised 06 Nov 2024.
    5. Taiga Saito & Akihiko Takahashi, 2025. "Super-Long Discount Rates for Insurers in Incomplete Markets with Bond Supply Control," CIRJE F-Series CIRJE-F-1241, CIRJE, Faculty of Economics, University of Tokyo.

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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

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