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The Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial Institutions

Robert Jarrow () and Sujan Lamichhane

Quarterly Journal of Finance (QJF), 2020, vol. 10, issue 01, 1-38

Abstract: On 21st September, 2016, the Bank of Japan (BOJ) embarked on a new unconventional monetary policy called yield curve control (YCC). We show that YCC creates an arbitrage opportunity in an otherwise frictionless and arbitrage-free government bond market which financial institutions can exploit. This arbitrage creates a wealth transfer from the BOJ to these financial institutions. We estimate the lower bound on this wealth transfer for the first 28 months to be $5.25 billion or ¥582.32 billion, which constitutes an unexplored policy externality. This corresponds to 7.49% per annum on the notional employed in this arbitrage strategy.

Keywords: Unconventional monetary policy; yield curve control; arbitrage; helicopter money; term structure of interest rates; policy externality (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S2010139220500044

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