Unconventional Monetary Policy and the Great Recession - Estimating the Impact of a Compression in the Yield Spread at the Zero Lower Bound

52 Pages Posted: 22 Oct 2010

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Luca Benati

European Central Bank (ECB)

Date Written: October 11, 2010

Abstract

We explore the macroeconomic impact of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a Bayesian time-varying parameter structural VAR. We identify a ‘pure’ spread shock which, leaving the short-term rate unchanged by construction, allows us to characterise the macroeconomic impact of a compression in the yield spread induced by central banks’ asset purchases within an environment in which the short rate cannot move because it is constrained by the zero lower bound. Two main findings stand out. First, in all the countries we analyse (U.S., Euro area, Japan, and U.K.) a compression in the long-term yield spread exerts a powerful effect on both output growth and inflation. Second, conditional on available estimates of the impact of the FED’s and the Bank of England’s asset purchase programmes on long-term government bond yield spreads, our counterfactual simulations indicate that U.S. and U.K. unconventional monetary policy actions have averted significant risks both of deflation and of output collapses comparable to those that took place during the Great Depression.

Keywords: Great Recession, structural VARs, time-varying parameters, Bayesian VARs, stochastic volatility, Monte Carlo integration, policy counterfactuals

JEL Classification: E30, E32

Suggested Citation

Baumeister, Christiane and Benati, Luca, Unconventional Monetary Policy and the Great Recession - Estimating the Impact of a Compression in the Yield Spread at the Zero Lower Bound (October 11, 2010). ECB Working Paper No. 1258. Available at SSRN: https://ssrn.com/abstract=1691633

Christiane Baumeister (Contact Author)

University of Notre Dame ( email )

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HOME PAGE: http://https://sites.google.com/site/cjsbaumeister/

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Luca Benati

European Central Bank (ECB) ( email )

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Frankfurt am Main, 60314
Germany

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