Evidence on the portfolio balance channel of quantitative easing
With its interest rate instrument at the zero lower bound, the Federal Open Market Committee has turned to unconventional methods to stimulate economic growth and increase employment. Prominent among these is quantitative easing (QE)—the purchase of a large quantity of longer-term debt. Policymakers and analysts have argued that QE works through the so-called portfolio balance channel: it reduces long-term yields by reducing the term premium investors require to hold long-dated securities. I present several reasons to be skeptical of the theoretical foundations of this portfolio balance channel and offer several arguments for why the effect of QE might be relatively small even if it is theoretically valid. Consistent with these arguments, an empirical analysis using a variety of interest rate variables and public debt supply measures used in the literature finds essentially no support for the portfolio balance channel.>
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kool, Clemens J. M. & Thornton, Daniel L., 2004.
"A note on the expectations hypothesis at the founding of the Fed,"
Journal of Banking & Finance,
Elsevier, vol. 28(12), pages 3055-3068, December.
- Clemens J. M. Kool & Daniel L. Thornton, 2003. "A note on the expectations hypothesis at the founding of the Fed," Working Papers 2000-004, Federal Reserve Bank of St. Louis.
- Daniel L. Thornton, 2004.
"Tests of the expectations hypothesis: resolving the anomalies when the short-term rate is the federal funds rate,"
2000-003, Federal Reserve Bank of St. Louis.
- Thornton, Daniel L., 2005. "Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2541-2556, October.
- Johannes C. Stroebel & John B. Taylor, 2009. "Estimated Impact of the Fed's Mortgage-Backed Securities Purchase Program," NBER Working Papers 15626, National Bureau of Economic Research, Inc.
- Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
- Eric T. Swanson, 2011.
"Let's Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2,"
2011 Meeting Papers
982, Society for Economic Dynamics.
- 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.
- 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.
- Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers 393, Bank of England.
- 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.
- Michael D. Bauer & Glenn D. Rudebusch, 2011. "The signaling channel for Federal Reserve bond purchases," Working Paper Series 2011-21, Federal Reserve Bank of San Francisco.
- Daniel L. Thornton & Giorgio Valente, 2010. "Predicting bond excess returns with forward rates: an asset-allocation perspective," Working Papers 2010-034, Federal Reserve Bank of St. Louis.
- Massimo Guidolin & Daniel L. Thornton, 2010. "Predictions of short-term rates and the expectations hypothesis," Working Papers 2010-013, Federal Reserve Bank of St. Louis.
When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2012-015. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)
If references are entirely missing, you can add them using this form.