A Quantitative Easing Experiment
37 Pages Posted: 29 Nov 2017
There are 3 versions of this paper
Date Written: November 23, 2017
Abstract
This paper presents experimental evidence that quantitative easing can be effective in raising bond prices even if bonds and cash are perfect substitutes and the path of interest rates is fixed. Despite knowing the fundamental value of bonds, participants in the experiment clearly believed that bond prices would trade above this value when they knew that a central bank would buy a large fraction of the outstanding market in a quantitative easing operation. By contrast, there was no average deviation of prices from fundamentals when it was known that trading only occurred between participants themselves. Prices rose and then fell if the central bank bought and then sold but stayed high if the central bank held the bonds to maturity.
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