Does quantitative easing affect market liquidity?
The second round of large-scale asset purchases by the Federal Reserve—frequently referred to as QE2—included repeated purchases of Treasury inflation-protected securities (TIPS). To quantify the effect QE2 had on the functioning of the TIPS market and the related market for inflation swaps, we exploit the measure of combined liquidity premiums in TIPS yields and inflation swap rates derived by Christensen and Gillan (2012). We find that, on TIPS purchase dates, the liquidity premium dropped by 8 to 11 basis points depending on maturity, or about 50 percent. Furthermore, the effect was sustained on nonpurchase dates during most of the program, but dissipated towards its end.
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- Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010.
"Large-scale asset purchases by the Federal Reserve: did they work?,"
441, Federal Reserve Bank of New York.
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- Jens H. E. Christensen & Glenn D. Rudebusch, 2012.
"The Response of Interest Rates to US and UK Quantitative Easing,"
Royal Economic Society, vol. 122(564), pages F385-F414, November.
- Jens H.E. Christensen & Glenn D. Rudebusch, 2012. "The response of interest rates to U.S. and U.K. quantitative easing," Working Paper Series 2012-06, Federal Reserve Bank of San Francisco.
- Joseph G. Haubrich & George Pennacchi & Peter Ritchken, 2011.
"Inflation expectations, real rates, and risk premia: evidence from inflation swaps,"
1107, Federal Reserve Bank of Cleveland.
- Joseph Haubrich & George Pennacchi & Peter Ritchken, 2012. "Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1588-1629.
- Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, December.
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