Monetary Policy at the Zero Lower Bound: Information in the Federal Reserve's Balance Sheet

TY - JOUR

T1 - Monetary Policy at the Zero Lower Bound: Information in the Federal Reserve's Balance Sheet

AU - Golinski, Adam

N1 - © 2020 Elsevier B.V. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.

PY - 2021/1/1

Y1 - 2021/1/1

N2 - I examine the impact of the actual purchases of Treasury securities by the Federal Reserve on Treasury yields. Using structural stability tests I find significant breaks in the relation between these variables. I find that in the zero lower bound period following the first phase of quantitative easing, May 2010 to December 2015, the actual purchases of Treasury securities by the Federal Reserve are positively related to changes in Treasury yields. This effect is driven primarily by the positive relation of the Treasury purchases with the bond risk premium, but they are also positively related to the expected inflation rate and the real rate of interest. The evidence is consistent with the liquidity channel hypothesis as put forward by Krishnamurthy and Vissing-Jorgensen (2011), since the Federal Reserve's Treasury purchases also strongly predict a lower corporate yield spread. Using a macro-finance term structure model I provide counterfactual estimates of the Treasury yields in the zero lower bound period. The counterfactual 10-year yield and the term premium are considerably smaller during QE2 but close to the actual time series for most of the rest of the lower bound period.

AB - I examine the impact of the actual purchases of Treasury securities by the Federal Reserve on Treasury yields. Using structural stability tests I find significant breaks in the relation between these variables. I find that in the zero lower bound period following the first phase of quantitative easing, May 2010 to December 2015, the actual purchases of Treasury securities by the Federal Reserve are positively related to changes in Treasury yields. This effect is driven primarily by the positive relation of the Treasury purchases with the bond risk premium, but they are also positively related to the expected inflation rate and the real rate of interest. The evidence is consistent with the liquidity channel hypothesis as put forward by Krishnamurthy and Vissing-Jorgensen (2011), since the Federal Reserve's Treasury purchases also strongly predict a lower corporate yield spread. Using a macro-finance term structure model I provide counterfactual estimates of the Treasury yields in the zero lower bound period. The counterfactual 10-year yield and the term premium are considerably smaller during QE2 but close to the actual time series for most of the rest of the lower bound period.

KW - Quantitative Easing

KW - zero lower bound

KW - unconventional monetary policy

KW - Treasury yields

KW - liquidity channel

U2 - 10.1016/j.euroecorev.2020.103613

DO - 10.1016/j.euroecorev.2020.103613

M3 - Article

SN - 0014-2921

VL - 131

JO - European economic review

JF - European economic review

M1 - 103613

ER -