The Federal Reserve's Large-Scale Asset Purchase Programs: Rationale and Effects

58 Pages Posted: 8 Jan 2013

See all articles by Stefania D'Amico

Stefania D'Amico

Board of Governors of the Federal Reserve System

William B. English

Government of the United States of America - Division of Monetary Affairs

David Lopez-Salido

Board of Governors of the Federal Reserve System

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: December 7, 2012

Abstract

We provide empirical estimates of the effect of large-scale asset purchase (LSAP)-style operations on longer-term U.S. Treasury yields within a framework that nests the alternative theoretical perspectives on LSAPs. As the principal channels through which LSAPs might matter for longer-term interest rates, we concentrate on (i) the scarcity (available local supply) channel associated with the traditional preferred habitat literature, and (ii) the duration channel associated with the general notion of interest rate risk. We also clarify LSAPs' role in the broader context of monetary policy strategy, bringing out the connections between purchases of longer-term assets and historical Federal Reserve policy approaches. Our results indicate that the impact of LSAP-style operations on longer-term interest rates is mainly felt on the nominal term-premium component; moreover, within the nominal term premium, it is the real term premium that experiences the greatest response. The estimates suggest that the scarcity and duration channels have both been of considerable importance for the transmission of purchases to longer-term Treasury yields. Finally, by isolating the degree to which scarcity and duration impinge on term premiums, our estimates indicate the direction in which macroeconomic models should develop in order to encompass the transmission channels associated with LSAPs.

Keywords: large-scale asset purchases, history of unconventional monetary policy, monetary transmission mechanism, longer-term interest rates, preferred habitat, duration channel

JEL Classification: E52, E58, G12

Suggested Citation

D'Amico, Stefania and English, William B. and Lopez-Salido, David and Nelson, Edward, The Federal Reserve's Large-Scale Asset Purchase Programs: Rationale and Effects (December 7, 2012). FEDS Working Paper No. 2012-85. Available at SSRN: https://ssrn.com/abstract=2197519 or http://dx.doi.org/10.2139/ssrn.2197519

Stefania D'Amico

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

William B. English

Government of the United States of America - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-736-5645 (Phone)
202-452-3819 (Fax)

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Edward Nelson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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