The Signaling Channel for Federal Reserve Bond Purchases
International Journal of Central Banking, Forthcoming
47 Pages Posted: 3 Oct 2013
Date Written: April 3, 2013
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: Suggested Citation