In this paper we develop on the VAR framework, originally proposed by Campbell and Shiller(1987) to evaluate the Expectations Theory, along three dimensions: the use of a testing method based on a real-time procedure in which the econometrician is given the same information available to market participants, the measurement of the risk premium, the specification of the implicit monetary policy maker's reaction function. We use financial factors and macroeconomic information to construct a test of the theory based on simulating investors' effort to use the model in 'real time' to forecast future monetary policy rates. The application of our approach to a monthly sample of US data from the eighties onward delivers an explicit estimate for risk premia with an associated confidence interval. The observation of such variables leads us to conclude that the deviation from the ET are not always significant and that fluctuations of risk premia are not large when some forecasting model for short-term rates is adopted and a proper evaluation of uncertainty associated to policy rates forecast is considered.JEL Classification: E43, E44, E47

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In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to £10bn of sterling corporate bonds. To investigate the impact of these purchases on liquidity, we create a novel dataset that combines transaction-level data from the secondary corporate bond market with proprietary offer-level data from the BoE's CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is potentially impacted by reverse causality, because liquidity considerations might impact purchases. But the offer-level data allow us to construct proxy measures for the BoE's demand for bonds and auction participants' supply of bonds, meaning that we can control for the impact of liquidity on purchases. Across a range of liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.

By constructing and estimating a structural arbitrage-free model of demand pressures on US real rates, we find that recent purchases of US government debt securities by the Fed and foreign officials have significantly affected the level and the dynamics of US real rates. In particular, by 2008, foreign purchases of US Treasuries are estimated to have had cumulatively reduced long term real yields by around 80 basis points. The subsequent total impact of Fed purchases in 2008-2012 has been even larger: the quantitative easing (QE) has depressed real 10-year yields by around 140 basis points. Our findings also reveal that the Fed policy interventions and foreign official purchases affect longer term real bonds mostly through a reduction in the bond premium.