Flow Effects of Large-Scale Asset Purchases

Abstract

How large-scale asset purchase (LSAP) programs affect financial markets is an important question for policy makers that face the zero lower bound. In this paper, we analyze so-called “flow effects” that may occur at the time of LSAP transactions. Using security-level transaction data related to four distinct programs over a period of roughly four years, we test for the presence of flow effects in both price and liquidity of Treasury securities. We show that flow effects in security prices are present during early LSAPs by the Federal Reserve, but they are of little economic significance. Alternatively, we find no evidence for systematic liquidity flow effects in any of the LSAP programs.

Keywords: LSAP, Quantitative Easing, Open Market Operations, Liquidity, Monetary Policy

JEL Classification: E52, E58, E65, G12