Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets

44 Pages Posted: 10 Apr 2017 Last revised: 11 Sep 2024

See all articles by Eric T. Swanson

Eric T. Swanson

University of California, Irvine - Department of Economics

Date Written: April 2017

Abstract

I extend the methods of G ̈urkaynak, Sack, and Swanson (2005) to separately identify the effects of Federal Reserve forward guidance and large-scale asset purchases (LSAPs) during the 2009–15 U.S. zero lower bound (ZLB) period. I find that both forward guidance and LSAPs had substantial and highly statistically significant effects, comparable in magnitude to the effects of the federal funds rate before the ZLB. Forward guidance was more effective than LSAPs at moving short-term Treasury yields, while LSAPs were more effective than forward guidance and the federal funds rate at moving longer-term Treasury and corporate bond yields. I estimate that the effects of LSAP announcements were very persistent, with the exception of the very large and perhaps special March 2009 “QE1” announcement. The effects of forward guidance are slightly less persistent, but the difference is not statistically significant and is likely due to the FOMC’s forward guidance announcements having a relatively shorter horizon.

Suggested Citation

Swanson, Eric T., Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets (April 2017). NBER Working Paper No. w23311, Available at SSRN: https://ssrn.com/abstract=2949615

Eric T. Swanson (Contact Author)

University of California, Irvine - Department of Economics ( email )

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