The Impact of Quantitative Easing on Interest Rates

Abstract

In this chapter, we empirically examine the impact of the recent quantitative easing (QE)-related announcements by the Federal Reserve, Bank of England, Bank of Japan, and European Central Bank on their respective government bond yields using an event study methodology. This methodology has been widely used in the recent studies on the similar topics (see, for example, Kapetanios et al. 2012; Christensen and Rudebusch 2012; Joyce et al. 2011a, b; Lam 2011; etc.). Following the literature, our event study focuses on the immediate changes in government bond yields over a fairly narrow interval around the QE-related announcements to capture the market’s direct reaction to the news released, and we then take the cumulative change over all the relevant events as a measure of the overall effects of QE-related announcements on interest rates. Given the fundamental differences in both the instruments used and the structures of the economies, interest rates are likely to respond to QE-related announcements in different ways across the economies.