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The Federal Reserve’s Large-Scale Asset Purchase Programs: Rationale and Effects

Stefania D'Amico, William English, David Lopez-Salido () and Edward Nelson ()

No 9145, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We provide empirical estimates of the effect of large-scale asset purchase (LSAP)-style operations on longer-term U.S. Treasury yields within a framework that nests the alternative theoretical perspectives on LSAPs. As the principal channels through which LSAPs migh tmatter for longer-term interest rates, we concentrate on (i) the scarcity (available local supply) channel associated with the traditional preferred habitat literature, and (ii) the duration channel associated with the general notion of interest rate risk. Wealso clarify LSAPs’ role in the broader context of monetary policy strategy, bringing out the connections between purchases of longer-term assets and historical Federal Reserve policy approaches. Our results indicate that the impact of LSAP-style operations on longer-term interest rates is mainly felt on the nominal term-premium component; moreover, within the nominal term premium, it is the real term premium that experiences the greatest response. The estimates suggest that the scarcity and duration channels have both been of considerable importance for the transmission of purchases to longer-term Treasury yields. Finally, by isolating the degree to which scarcity and duration impinge on term premiums, our estimates indicate the direction in which macroeconomic models should develop in order to encompass the transmission channels associated with LSAPs.

Keywords: CUSIP-level data; history of unconventional monetary policy; large-scale asset purchases; monetary transmission mechanism (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2012-09
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Journal Article: The Federal Reserve's Large‐scale Asset Purchase Programmes: Rationale and Effects (2012) Downloads
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