The signaling channel for Federal Reserve bond purchases

Michael Bauer and Glenn Rudebusch

No 2011-21, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: 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 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 unbiased model estimation and restricted risk price estimation. We also characterize the estimation uncertainty regarding the relative importance of the signaling and portfolio balance channels.

Keywords: Monetary policy; Interest rates; bond markets (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (67)

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Journal Article: The Signaling Channel for Federal Reserve Bond Purchases (2014)
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