The Interest Rate Effects of Government Bond Purchases Away from the Lower Bound
Sveriges Riksbank Working Paper Series No. 324
43 Pages Posted: 23 May 2016
Date Written: May 2016
I analyze the recent experience of unconventional monetary policy in Sweden to study the interest rate transmission mechanisms of government bond purchases when interest rates are not constrained by a lower bound. Using dynamic term structure models and event study regressions I find that government bond purchases have important portfolio balance and signaling effects. The signaling channel operates mainly by lowering short-rate expectations in the intermediate segment of the yield curve, while the portfolio balance channel is effective in lowering longer maturity term premia. In addition, I find that target interest rate policy and government bond purchases operate in different segments of the yield curve. This suggests that a combination of the two policies can be used to lower interest rates across the whole maturity spectrum, making monetary policy more expansionary.
Keywords: quantitative easing, signaling channel, portfolio balance channel, yield curve, dynamic affine term structure models, short rate expectations, term premium
JEL Classification: E43, E44, E52
Suggested Citation: Suggested Citation