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Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets

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  • Eric Swanson

    (University of California Irvine)

Abstract

I adapt the methods of Gurkaynak, Sack, and Swanson (2005) to estimate two dimensions of monetary policy during the 2009–2015 zero lower bound period in the U.S. I show that, after a suitable rotation, these two dimensions can be interpreted as “forward guidance†and “large-scale asset purchases†(LSAPs). I estimate the sizes of the forward guidance and LSAP components of each FOMC announcement between January 2009 and October 2015, and show that those estimates correspond closely to identifiable features of major FOMC announcements over that period. Forward guidance has relatively small effects on the longest-maturity Treasury yields and essentially no effect on corporate bond yields, while LSAPs have large effects on those yields but essentially no effect on short-term Treasuries. Both types of policies have significant effects on medium-term Treasury yields, stock prices, and exchange rates. However, these effects do not seem to be very persistent.

Suggested Citation

  • Eric Swanson, 2016. "Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets," 2016 Meeting Papers 1222, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1222
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    References listed on IDEAS

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    1. Lawrence H. Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
    2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    3. Jonathan H. Wright, 2011. "What does Monetary Policy do to Long-Term Interest Rates at the Zero Lower Bound?," NBER Working Papers 17154, National Bureau of Economic Research, Inc.
    4. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    5. Darrell Duffie, 2010. "Presidential Address: Asset Price Dynamics with Slow‐Moving Capital," Journal of Finance, American Finance Association, vol. 65(4), pages 1237-1267, August.
    6. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-631, August.
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    More about this item

    JEL classification:

    • 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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