The Cost of Quantitative Easing: Liquidity and Market Functioning Effects of Federal Reserve MBS Purchases

John Kandrac
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John Kandrac: Board of Governors of the Federal Reserve System

International Journal of Central Banking, 2018, vol. 14, issue 5, 259-304

Abstract: In this paper, I evaluate one of several commonly cited potential costs of quantitative easing. Specifically, I assess the effect of ongoing Federal Reserve mortgage-backed securities (MBS) purchases on MBS market liquidity. Examining several standard liquidity indicators, I find that Federal Reserve MBS purchases adversely affected average trading volume, trade sizes, and the number of trades. Bid-ask spreads remained mostly unaffected, although a spread widening in response to Fed purchases evidently emerged just after the beginning of the largest MBS purchase program. Although the marginal liquidity effects of purchases can be sizable, the economic magnitude of the effects is relatively modest when taking into account the size of Federal Reserve MBS operations. Lastly, I find no evidence of impaired price discovery in the MBS market during the time of Federal Reserve purchases.

JEL-codes: E52 E58 E65 G10 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (11)

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