The Efficacy of Large-Scale Asset Purchases When the Short-Term Interest Rate Is at Its Effective Lower Bound

Abstract

Although the initial announcements of these policies were associated with dramatic market reactions, these responses were soon reversed. The overall market reaction to news surprises from the Federal Reserve over this period was increases, not decreases, in interest rates. It is hard to disentangle the effects of the purchases themselves from new information about economic fundamentals. My conclusion is that it is difficult to estimate accurately what large-scale asset purchases accomplished, but the magnitude of the effect is likely smaller than commonly believed. T he traditional instrument of monetary policy is the short-term interest rate, which was stuck near zero in a number of the world's largest economies over much of the last decade. Central banks in the United States, Europe, and Japan purchased many trillions of dollars in securities in an effort to provide the stimulus that their traditional policy instrument could not. The U.S. Federal Reserve increased its holdings of Treasury securities, mortgage-backed securities, and agency debt from under $600 billion at the start of March 2009 to over $4.4 trillion by the end of 2014 (see figure 1). What did these large-scale asset purchases (LSAPs) accomplish? Many standard macroeconomic and finance models predict that LSAPs would not affect any nominal or real variable of interest if the traditional policy rate is at its effective lower bound (ELB). If being at the ELB means

Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession

“…Figure 15 shows mortgage rates in the model and data. If explicitly financed by government purchases, the cumulative fiscal cost of such a rate reduction in the model amounts to 20% of annual goods output, which is just below empirical estimates of 25%-29% of GDP from Kuttner (2018), Hamilton (2018), and Gagnon and Sack (2018).…”

Bayesian Econometrics

“…Since then, a number of authors proposed the use of external instruments, based on either the narrative approach (Romer and Romer 2004) or high frequency information (Gertler and Karadi 2015;Miranda-Agrippino and Ricco 2017). However, also, this literature came under criticism, since as pointed out by Hamilton (2018), Fed announcements provide not only information about a policy action, but about the Fed's assessment of future economic conditions, and these effects are not easily separated. An approach to separate these effects is provided in Miranda-Agrippino (2016) and Nakamura and Steinsson (2018).…”

Perspectives on U.S. Monetary Policy Tools and Instruments

“…In many standard macroeconomic and finance models, if the nominal interest rate is zero, purchases of securities by the central bank would have no effects on any real or nominal variable of interest; see for example Eggertsson and Woodford (2003). As discussed by Hamilton (2018), adding various financial frictions to the models can change that prediction; see among others Cúrdia and Woodford (2011), Gertler and Karadi, (2011), Chen, Cúrdia and Ferrero (2012, Hamilton and Wu (2012), Woodford (2012), Greenwood and Vayanos (2014), Eggertsson and Proulx (2016), and Caballero and Farhi (2017). However, it is not clear from theory how large the potential stimulus arising from these channels could be.…”