Analyzing Federal Reserve asset purchases: From whom does the Fed buy?

Seth Carpenter, Selva Demiralp, Jane Ihrig and Elizabeth Klee

Journal of Banking & Finance, 2015, vol. 52, issue C, 230-244

Abstract: Asset purchases have become an important monetary policy tool of the Federal Reserve in recent years. To date, most studies of the Federal Reserve’s asset purchases have tried to measure the interest rate effects of the purchases, and several provide evidence that these purchases do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to “preferred habitat” models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities of securities. To study this more closely, we exploit Flow of Funds data to assess the types of investors that are selling to the Federal Reserve and their portfolio adjustment after these sales, which could provide a view to the plausibility of preferred habitat models and the transmission of unconventional monetary policy across asset markets. We find that the Federal Reserve is ultimately buying from only a handful of investor types, primarily households (which includes hedge funds), with a different reaction to changes in Federal Reserve holdings of longer-term versus shorter-term assets. Although not evident for all investors, the key participants are shown to rebalance their portfolios toward more risky assets during this period. These results can be interpreted as supporting, at least in part, the preferred habit theory and the view that the monetary policy transmission is working across asset markets.

Keywords: Unconventional monetary policy; Large-scale asset purchases; Portfolio reallocation (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Working Paper: Analyzing Federal Reserve asset purchases: from whom does the Fed buy? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:52:y:2015:i:c:p:230-244

DOI: 10.1016/j.jbankfin.2014.04.029

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