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Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound

Christiane Baumeister () and Luca Benati ()

Staff Working Papers from Bank of Canada

Abstract: We explore the macroeconomic effects of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a time-varying parameter structural VAR model. We identify a ‘pure’ spread shock defined as a shock that leaves the policy rate unchanged, which allows us to characterize the macroeconomic consequences of a decline in the yield spread induced by central banks’ asset purchases within an environment in which the policy rate is constrained by the effective zero lower bound. Two key findings stand out. First, compressions in the long-term yield spread exert a powerful effect on both output growth and inflation. Second, conditional on available estimates of the impact of the Federal Reserve’s and the Bank of England’s asset purchase programs on long-term yield spreads, our counterfactual simulations suggest that U.S. and U.K. unconventional monetary policy actions have averted significant risks both of deflation and of output collapses comparable to those that took place during the Great Depression.

Keywords: Econometric and statistical methods; Interest rates; Monetary policy framework; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 E58 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2012
New Economics Papers: this item is included in nep-mac and nep-mon
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Journal Article: Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:12-21

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