The Effects of Quantitative Easing on Interest Rates
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)
Northwestern University - Kellogg School of Management
February 10, 2011
We evaluate the effect of the Federal Reserve’s purchase of long-term Treasuries and other long-term bonds ("QE1" in 2008-2009 and "QE2" in 2010-2011) on interest rates. Using an event-study methodology that exploits both daily and intra-day data, we find a large and significant drop in nominal interest rates on long-term safe assets (Treasuries, Agency bonds, and highly-rated corporate bonds). This occurs mainly because there is a unique clientele for long-term safe nominal assets, and the Fed purchases reduce the supply of such assets and hence increase the equilibrium safety-premium. We find only small effects on nominal (default-adjusted) interest rates on less safe assets such as Baa corporate rates. The impact of quantitative easing on MBS rates is large when QE involves MBS purchases, but not when it involves Treasury purchases, indicating that a second main channel for QE is to affect the equilibrium price of mortgage-specific risk. Evidence from inflation swap rates and TIPS show that expected inflation increased due to both QE1 and QE2, implying that reductions in real rates were larger than reductions in nominal rates. Our analysis implies that (a) it is inappropriate to focus only on Treasury rates as a policy target because QE works through several channels that affect particular assets differently, and (b) effects on particular assets depend critically on which assets are purchased.
Number of Pages in PDF File: 37working papers series
Date posted: March 14, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.501 seconds