Macroeconomic Effects of Large-Scale Asset Purchases: New Evidence

53 Pages Posted: 21 Jun 2020

See all articles by Kyungmin Kim

Kyungmin Kim

Board of Governors of the Federal Reserve System

Thomas Laubach

Federal Reserve Board

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Date Written: June, 2020

Abstract

We examine the macroeconomic effect of large-scale asset purchases (LSAPs) and forward guidance (FG) using a proxy structural VAR estimated on data through 2015, where the stance of the LSAP policy is measured using primary dealer expectations of the Federal Reserve's asset holdings. Monetary policy shocks are identified using instruments constructed from event study yield changes, and additional assumptions are employed to separately identify LSAP and FG shocks. We find that unexpected expansions in the Federal Reserve's asset holdings during the ZLB period between 2008 and 2015 had significant expansionary effects on the macroeconomy, with real activity and inflation rising and unemployment declining notably following the shock. The policy accommodation appears to be transmitted to the economy both through financial markets-including Treasury yields, credit spreads and equity prices-and through bank lending. The effects on Treasury yields and term premiums appear to be longer-lived than previously documented, while the effects on credit spreads and especially bank lending also appear persistent. These results appear fairly robust to alternative identification and econometric methodologies, alternative policy indicators and instruments, and controlling for any possible Federal Reserve information effect. A counterfactual analysis shows that absent the LSAP3 program implemented between late 2012 and 2014, CPI inflation would have been about 1 percentage point lower, while the unemployment rate would have been about 4 percentage points higher, by the end of 2015.

Keywords: Unconventional monetary policy, Forward guidance, Quantitative easing (QE), Structural VAR, External instruments, Identification, Primary dealer survey, Macro effects

JEL Classification: E44, E52, E58

Suggested Citation

Kim, Kyungmin and Laubach, Thomas and Wei, Min, Macroeconomic Effects of Large-Scale Asset Purchases: New Evidence (June, 2020). FEDS Working Paper No. 2020-047, Available at SSRN: https://ssrn.com/abstract=3631106 or http://dx.doi.org/10.17016/FEDS.2020.047

Kyungmin Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Thomas Laubach

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2715 (Phone)
202-452-3819 (Fax)

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
36
Abstract Views
135
PlumX Metrics