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Liquidity Effects of Quantitative Easing on Long-Term Interest Rates

Author

Listed:
  • Signe Krogstrup
  • Samuel Reynard
  • Barbara Sutter

Abstract

This paper argues that the expansion in reserves following recent quantitative easing programs of the Federal Reserve may have affected long-term interest rates through liquidity effects. The data lends some support for liquidity effects, in that reserves were negatively correlated with long-term yields at the zero lower bound. Estimates suggest that between January 2009 and 2011, 10-year US Treasury yields fell 46-85 basis points as a result of liquidity effects. The liquidity effect is separate from the portfolio balance effect of the change in the public supply of Treasury bonds, which is estimated to have reduced yields by another 20 basis points during that period.

Suggested Citation

  • Signe Krogstrup & Samuel Reynard & Barbara Sutter, 2012. "Liquidity Effects of Quantitative Easing on Long-Term Interest Rates," Working Papers 2012-02, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2012-02
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    File URL: https://www.snb.ch/n/mmr/reference/working_paper_2012_02/source/working_paper_2012_02.n.pdf
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    References listed on IDEAS

    as
    1. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, February.
    2. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-1247, December.
    3. Joseph E. Gagnon & Matthew Raskin & Julie Remache & Brian P. Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 41-59.
    4. Daniel L. Thornton, 2007. "The daily and policy-relevant liquidity effects," Working Papers 2007-001, Federal Reserve Bank of St. Louis.
    5. 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.
    6. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
    7. Andrés, Javier & López-Salido, J David & Nelson, Edward, 2004. "Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium," CEPR Discussion Papers 4336, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Dimitri O. Ledenyov & Viktor O. Ledenyov, 2013. "To the problem of turbulence in quantitative easing transmission channels and transactions network channels at quantitative easing policy implementation by central banks," Papers 1305.5656, arXiv.org, revised May 2013.
    2. Niall Ferguson & Andreas Schaab & Moritz Schularick, 2015. "Central Bank Balance Sheets: Expansion and Reduction since 1900," CESifo Working Paper Series 5379, CESifo Group Munich.
    3. Bernhard, Severin & Ebner, Till, 2017. "Cross-border spillover effects of unconventional monetary policies on Swiss asset prices," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 109-127.
    4. Mirkov, Nikola & Sutter, Barbara, 2012. "Central Bank Reserves and the Yield Curve at the ZLB," Working Papers on Finance 1208, University of St. Gallen, School of Finance.
    5. Christensen, Jens H.E. & Krogstrup, Signe, 2014. "Transmission of Quantitative Easing: The Role of Central Bank Reserves," Working Paper Series 2014-18, Federal Reserve Bank of San Francisco, revised 20 Jun 2016.
    6. Duca, John V. & Murphy, Anthony, 2013. "Would a Bagehot style corporate bond backstop have helped counter the Great Recession?," Economics Letters, Elsevier, vol. 119(3), pages 351-353.
    7. Jiří Štekláč, 2015. "Politicko-ekonomické varianty vyhlazování hospodářského cyklu v soudobých úvěrových ekonomikách
      [Political-Economic Options for Smoothing of Business Cycles within the Current Credit-Economy]
      ," Politická ekonomie, University of Economics, Prague, vol. 2015(1), pages 3-31.

    More about this item

    Keywords

    Quantitative Easing; Reserves; Liquidity Effect; Long-Term Interest Rates; Zero Lower Bound; Monetary Policy; Portfolio Balance;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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