The Effects of Quantitative Easing: Taking a Cue from Treasury Auctions

Working Paper No. 24122 To understand the effects of large-scale asset purchase programs recently implemented by central banks, we study how markets absorb large demand shocks for risk-free debt. Using high-frequency identification, we exploit the structure of the primary market for U.S. Treasuries...

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Bibliographic Details
Published in:NBER Working Paper Series 2017-12, p.24122
Main Authors: Gorodnichenko, Yuriy, Walker, Ray
Format: Article
Language:English
Subjects:
Asset acquisitions
Auctions
Central banks
Economic crisis
Economic models
Economic theory
Federal Reserve monetary policy
Institutional investments
Interest rates
Monetary policy
Prices
Treasuries
Yield curve
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Summary:Working Paper No. 24122 To understand the effects of large-scale asset purchase programs recently implemented by central banks, we study how markets absorb large demand shocks for risk-free debt. Using high-frequency identification, we exploit the structure of the primary market for U.S. Treasuries to isolate demand shocks. These shocks are sizable, leading to large movements in Treasury yields and impacting corporate borrowing rates. Informed by a calibrated “preferred habitat” model of the term structure, we test for “local” demand effects and find evidence consistent with theoretical predictions. Crucially, this local effect is strongest when the risk-bearing capacity of arbitrageurs is low. Our estimates are consistent with the view that quantitative easing worked mainly via market segmentation, with a potentially limited role for other channels.
ISSN:0898-2937
DOI:10.3386/w24122