The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy

Arvind Krishnamurthy and Annette Vissing-Jorgensen

No 17555, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We evaluate the effect of the Federal Reserve's purchase of long-term Treasuries and other long-term bonds ("QE1" in 2008-2009 and "QE2" in 2010-2011) on interest rates. Using an event-study methodology we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target because QE works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and an MBS pre-payment channel and a corporate bond default risk channel for QE1. Second, effects on particular assets depend critically on which assets are purchased. The event-study suggests that (a) mortgage-backed securities purchases in QE1 were crucial for lowering mortgage-backed security yields as well as corporate credit risk and thus corporate yields for QE1, and (b) Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and Agencies relative to mortgage-backed securities and corporates, with yields on the latter falling primarily through the market's anticipation of lower future federal funds rates.

JEL-codes: E4 E5 G01 G14 G18 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: AP EFG ME
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Citations: View citations in EconPapers (917)

Published as Brookings Papers on Economic Activity The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy Fall 2011, Annette Vissing-Jorgensen and Arvind Krishnamurthy

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Journal Article: The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy (2011)
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