Unconventional Monetary Policy and the Interest Rate Channel: Signalling and Portfolio Rebalancing
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
In response to financial turmoil that began in 2007 and the effective lower bound for short-term interest rates that was reached in late-2008, the Federal Reserve adopted a raft of 'unconventional' monetary policies, notably: forward guidance and large-scale asset purchases. These policies transmit to the real economy, inter alia, via an interest rate channel, with two sub-channels: signalling and portfolio rebalancing. I apply the OIS-augmented decomposition of interest rates from Lloyd (2017a) to identify these two sub-channels. I demonstrate that US unconventional monetary policy announcements between November 2008 and April 2013 did exert significant signalling and portfolio balance effects on financial markets, reducing longer-term interest rates. Signalling effects were particularly powerful at horizons in excess of two years. As a result of these declines, unconventional monetary policy aided real economic outcomes. I show that the signalling channel exerted a more powerful influence on US industrial production and consumer prices than portfolio rebalancing. In terms of long-term bond yield and industrial production effects, the signalling channel is associated with around two-thirds to three-quarters of the total effects attributed to the two channels.
Keywords: Unconventional Monetary Policy; Large-Scale Asset Purchases; Forward Guidance; Signalling; Portfolio Rebalancing; Interest Rates; Term Structure; Overnight Indexed Swaps (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 E52 E58 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1735
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