Expectations of large-scale asset purchases

Guangye Cao and Andrew Foerster

Economic Review, 2013, issue Q II, 5-29

Abstract: During and after the recent financial crisis, the Federal Reserve turned to a number of unconventional tools to bolster the economy. The effectiveness of one such tool, large-scale asset purchases (LSAPs)?often referred to as quantitative easing?has been hard to measure. ; Efforts to estimate LSAP impact have often relied on an \\"event study\\" approach, focusing on short time intervals around the announcements of new LSAP programs. But these studies typically ignore the fact that financial market participants sometimes expect a given LSAP announcement in advance?and such expectations can affect interest rates prior to the time interval considered. ; Authors Foerster and Cao present evidence that LSAP announcements were often at least partially expected in advance, and they argue that event studies, by ignoring the effects of prior expectations, likely misestimate the impact of LSAPs.

Date: 2013
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