The Signaling Channel for Federal Reserve Bond Purchases

International Journal of Central Banking, Forthcoming

47 Pages Posted: 3 Oct 2013

See all articles by Michael Bauer

Michael Bauer

Universität Hamburg

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Date Written: April 3, 2013

Abstract

Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short-term interest rates. Our evidence comes from a model-free analysis and from dynamic term structure models that decompose declines in yields following Fed announcements into changes in risk premia and expected short rates. To overcome problems in measuring term premia, we consider bias-corrected model estimation and restricted risk price estimation. In comparison with other studies, our estimates of signaling effects are larger in magnitude and statistical significance.

Keywords: unconventional monetary policy, QE, LSAP, portfolio balance, no arbitrage

JEL Classification: E43, E52

Suggested Citation

Bauer, Michael and Rudebusch, Glenn D., The Signaling Channel for Federal Reserve Bond Purchases (April 3, 2013). International Journal of Central Banking, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2334518

Michael Bauer (Contact Author)

Universität Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

HOME PAGE: http://www.michaeldbauer.com

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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