Bond Markets and Unconventional Monetary Policy

Handbook of Fixed-Income Securities, First Edition. Edited by Pietro Veronesi. c 2015 John Wiley Sons, Inc.

40 Pages Posted: 24 Jun 2015 Last revised: 2 Jul 2015

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Paul Whelan

Copenhagen Business School

Date Written: April 2015

Abstract

This paper is a comprehensive study of the discussion and empirical evidence about the impact of unconventional monetary policy on bond markets. The 2007/2008 Financial Crisis marks the beginning of a new monetary policy regime in which central banks engaged in different types of large scale asset purchases. These decisions were unconventional with respect to the previous policy of targeting a short term interest rate. In this paper, we begin by comparing different measures adopted by the Federal Reserve, the European Central Bank, and the Bank of England. Next, we discuss (current) theoretical arguments through which unconventional policy (large scale asset purchases) might affect interest rates: (a) Portfolio Balance (duration) channel; (b) Credit and capital constraint channel; and (c) Preferred-habitat and Asset Scarcity channel. Finally, we review the empirical evidence in support of each channel using data from both Treasury and Mortgage-backed security markets. We distinguish two methodological approaches. The first is based on high-frequency data during the time surrounding specific LSAP event dates. The second approach uses low-frequency data and considers information beyond a narrowly defined event window. This allows us to distinguish short-term and long-term effect of different sets of unconventional measures.

Keywords: Interest Rates, Monetary Policy, Quantitative Easing, LSAPs, Financial Crisis

JEL Classification: E43, E44, E50, E51, E52, E58

Suggested Citation

Buraschi, Andrea and Whelan, Paul, Bond Markets and Unconventional Monetary Policy (April 2015). Handbook of Fixed-Income Securities, First Edition. Edited by Pietro Veronesi. c 2015 John Wiley Sons, Inc.. Available at SSRN: https://ssrn.com/abstract=2621639

Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paul Whelan (Contact Author)

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

Register to save articles to
your library

Register

Paper statistics

Downloads
152
Abstract Views
627
rank
192,245
PlumX Metrics