Large-scale Asset Purchase Programs Research Articles

Whatever-it-takes policymaking during the pandemic

Central banks across the globe introduced large-scale asset purchase programs to address the unprecedented circumstances experienced during the pandemic. Many of these programs were announced as open-ended to shock-and-awe market participants and restore confidence in financial markets. This paper examines whether these whatever-it-takes announcements had larger effects than announcements with explicit limits on scale. We use a narrative approach to categorize announcements made by twenty-two central banks, and event study, propensity-score-matching, and local projection methods to measure the short-term effects of policy announcements on exchange rates and sovereign bond yields. We find that on average a central bank’s first whatever-it-takes announcement lowers 10-year bond yields by an additional 47 basis points relative to size-limited announcements, suggesting that communication of potential policy scale matters. Our results for yields hold for both advanced and emerging economies, while exchange rates go in opposing directions, muting their response when we group all countries together.

Do financial markets react to emerging economies’ asset purchase program? Evidence from the COVID-19 pandemic period

We employ the daily data on bond yield, stock return, and exchange rate to explore their reaction to the large-scale asset purchase program for 8 emerging market economies during the COVID-19 pandemic period. Using event study analysis, we find that: (1) out of 8 emerging economies, 6 economies’ financial markets react to the asset purchase announcements. (2) Most economies witnessed a rise in stock return, and a fall in the yield rate. (3) 2 economies witnessed currency appreciation, while 3 economies experience currency depreciation. Overall, the asset purchase announcements have a mixed effect on the stock, bond, and foreign exchange markets. Hence, these should be included in the central bank’s toolbox as complementary instruments applied to address certain unprecedented economic circumstances.

Quantitative Easing and bank risk-taking behavior

In this paper, we examine the effect of reserve creation due to the Federal Reserve's Large-scale Asset Purchase programs on bank lending and risk-taking behavior. In particular, we test the existence of a risk-taking channel that induces banks with higher reserve accumulation due to the Fed's policy to increase the share of riskier loans. Exploiting the heterogeneity in the exposure to such asset purchase programs, as measured by relative mortgage-backed securities holdings in the banks' portfolios, we use difference-in-differences analysis to study the effect of the Fed's policies on the supply of total loans and the share of riskier loans such as real estate, commercial and industrial, and consumer loans. We find that the first and third round of Quantitative Easing (QE) policies led to an increase in both the total loans and the share of riskier loans within the banks' portfolios, supporting the risk-raking channel. The second round of QE on the other hand, had no significant impact on banks' lending behavior.

Long-term liquidity effects of large-scale asset purchase programs: Evidence from the euro covered bond market

This study aims to improve the knowledge around extensive asset purchase programs and their impact on market liquidity. It documents that such programs can dampen liquidity. The analysis uses fixed-effects regressions and a unique dataset of global euro-denominated covered bonds, which quantitative easing has affected to a larger extent than other markets. While the start of the central bank purchases amplifies liquidity for several weeks, liquidity declines after half a year. The drop relates to the central bank’s bond inventory. It is partly mitigated by a reduction in buying, but liquidity does not fully recover. The contemporaneous flow effect of purchase program buying is initially positive, but becomes negative when liquidity deteriorates. These findings help designing policy and understanding behavioral liquidity effects.

Exchange rate spillover, carry trades, and the COVID-19 pandemic

Although it is widely accepted that exchange rates are connected, what drives these connections remains an unsettled question. We examine the interconnections and spillovers of G10 currencies over the period from January 1, 2018 to June 17, 2021. We find that the Euro and Australian dollar serve as risk transmitters whereas the Japanese yen operates as a risk recipient. During the COVID-19 pandemic period, countries with higher infection cases experience currency depreciation and transmit more currency risk to others. In response to this crisis, the Fed adopted the large-scale asset purchase program that weakened the USD and increased the demand for high-yield currencies through the portfolio rebalancing channel. The appreciation of high-yield currencies further attracts carry trades and enhances their risk transmission to low-yield currencies. Furthermore, we provide evidence to show that the COVID-19 infection cases, the Fed's policy, and carry trades are crucial determinants of exchange rate spillovers.

The impact of forward guidance and large-scale asset purchase programs on commodity markets

Abstract This paper investigates how different commodity prices are affected by unconventional monetary policies (UMP) implemented by the Federal Reserve of the United States as a response to the Global Financial Crisis. We analyze impulse responses using local projections and identify UMP shocks through high-frequency identification strategy. We show that forward guidance (FG) and large-scale asset purchase (LSAP) shocks lead to distinct responses when analyzing commodity prices. We find that asset-like commodities, such as gold and silver, respond to these UMP shocks most aggressively. While an easing FG shock leads to increases in their prices, an easing LSAP shock has the opposite effect. This differential response suggests that these asset-like commodities are being used as inflation and exchange rate hedges. In contrast, production-like and agricultural commodities respond to UMP shocks in the same way as conventional monetary policy shocks. Consistent with previous literature, we find that easing LSAP shocks, to some extent, signal a negative economic outlook. Policymakers can exploit the responses from the various commodity classes examined in this paper when evaluating the effectiveness of monetary policy in different sectors of the economy.

Counteracting large-scale asset purchase program: The Bank of Japan’s ETF purchases and securities lending

This study investigates the impact of the Bank of Japan’s (BOJ) exchange traded fund (ETF) purchasing program on the stock lending market. In particular, we focus on the fact that stocks held by ETF managers for the BOJ are lendable to other investors in order for them to make a short position in stock market. Using individual stock level data, we show that expansions of the ETF purchase program have substantially increased the supply of stocks in the lending market by changing the behavior of stock holders as the BOJ is expected to be a “buy-and-hold” type of investor. This result implies that such an active stock lending market would help to reduce the side-effects of the ETF program whereas the squeezing effect of the program on supply–demand balance in spot stock markets is mitigated.

Counteracting Large-Scale Asset Purchase Program: The Bank of Japan's ETF Purchases and Securities Lending

This study investigates the impact of the Bank of Japan’s (BOJ) exchange traded fund (ETF) purchasing program on the stock lending market. In particular, we focus on the fact that stocks held by ETF managers for the BOJ are lendable to other investors in order for them to make a short position in stock market. Using individual stock level data, we show that expansions of the ETF purchase program have substantially increased the supply of stocks in the lending market by changing the behavior of stock holders as the BOJ is expected to be a “buy-and-hold” type of investor. This result implies that such an active stock lending market would help to reduce the side-effects of the ETF program whereas the squeezing effect of the program on supply-demand balance in spot stock markets is mitigated.

LESSONS FOR THE FED FROM THE PANDEMIC

The Covid-19 pandemic greatly increased the scope and power of the Federal Reserve. The Fed created a number of new emergency lending facilities, which allowed it to make off-balance sheet loans and buy the debt of corporations and municipalities through special purpose vehicles backstopped by the Treasury under the CARES Act. Meanwhile, the Fed's large-scale asset purchase program, known as quantitative easing (QE), was put on steroids after the pandemic struck in March 2020. The Fed has been purchasing longer-term Treasuries and mortgage-backed securities amounting to $120 billion per month, pushing the size of its balance sheet to an astonishing $7 trillion.Of course, the pandemic and lockdowns, which put the economy in a downward spiral, justified pumping liquidity into the financial system. But the shift toward allocating credit and the drift into fiscal policy have put the Fed's independence and credibility at risk. Indeed, those actions have set a precedent for the future, making it difficult for the Fed to normalize monetary policy and adhere to its primary function of providing sound money and a stable growth of nominal income.This conference's focus is on digital currency. In my remarks today, I will paint with a broader brush and briefly discuss the lessons I think the Fed can learn from the pandemic, including why it is important to leave entrepreneurs free to experiment with digital currencies and why any credible monetary system ultimately needs to be based on a genuine rule of law. I shall begin by arguing that while Covid-19 has been costly, both in terms of human and economic losses, it has provided for deregulation and innovation that will benefit society.

Long-Term Liquidity Effects of Large-Scale Asset Purchase Programs: Evidence from the Euro Covered Bond Market

Long-Term Liquidity Effects of Large-Scale Asset Purchase Programs: Evidence from the Euro Covered Bond Market

Macroeconomic Effects of Federal Reserve's Unconventional Monetary Policy: A Computational Linguistics Approach

I propose a new approach to estimating the Federal Reserve’s unconventional monetary policy after the Great Recession. During the 2009-2015 U.S. zero lower bound period, the Federal Reserve resorted to unconventional policies like forward guidance and large-scale asset purchases. I quantify these policies by creating an unconventional monetary policy index using computational linguistics and machine learning on the FOMC meeting minutes. This index provides information on how much of the discussion during each meeting was pertaining to the large-scale asset purchase program and forward guidance. A positive shock to this measure can be interpreted as more discussion about this topic in particular meeting. Using such shocks as instruments in a in a factor-augmented vector auto-regression framework, I find that the Fed’s unconventional policy had its desired effects of stimulating the economy, by increasing output and reducing the unemployment rate. I also find significant, albeit less, effects on the financial markets.

Portfolio rebalancing and the transmission of large-scale asset purchase programs: Evidence from the Euro area

The European Central Bank's large-scale asset purchase program targeted safe assets, but also aimed to impact prices of risky assets. The mechanism for this is the “portfolio rebalancing channel”, where financial institutions’ portfolio decisions impact financial prices more broadly. We examine this mechanism using cross-sectional heterogeneity in how the financial portfolios of different sectors of the European economy were affected around the purchase program. We find evidence of rebalancing. In vulnerable countries, where macroeconomic unbalances and relatively high risk premia remained, we document rebalancing towards riskier securities. In less vulnerable countries, based on granular information for large European banks, we document rebalancing toward bank loans.

The impact of quantitative easing on liquidity creation

• We study the impact of the Fed’s three rounds of QE on bank liquidity creation. • Banks create liquidity by financing illiquid assets with liquid liabilities. • We use a sample of US banks over 2006-14 and a difference-in-difference methodology. • Banks more exposed to QE increased lending during the first and third round of QE. • Liquidity creation among treated banks was higher only during the last round of QE. We study the effects of the US Federal Reserve’s large-scale asset purchase programs during 2008–2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing (QE) into illiquid assets. As the composition of banks’ loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks more affected by the policy increased lending relative to those less affected, mainly during the first and third round of QE. However, we only find a strong effect of the policy on liquidity creation during the third round of QE. This points to a weaker impact on the real economy during the first two rounds, when more exposed banks transformed the reserves created through QE into less illiquid assets, such as real estate mortgages.

The Impact of Quantitative Easing on Liquidity Creation

We study the effects of the US Federal Reserve’s large-scale asset purchase programs during 2008-2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing into illiquid assets. As the composition of banks’ loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks that were more exposed to the policy increased lending relative to a control group. However, while the increase in lending was present across all three rounds of quantitative easing, we only find a strong effect on liquidity creation during the last round. This suggests, that during the first two rounds, affected banks transformed the reserves created through the asset purchase program into less illiquid assets, such as real estate mortgages, pointing to a weaker impact of the policy on the real economy.

Confidence in future monetary policy as a way to overcome the liquidity trap

The global financial crisis of 2007–2009 has changed the landscape for monetary policy. Many central banks in developed economies had to employ various unconventional policy tools to overcome a liquidity trap. These included large-scale asset purchase programs, forward guidance and negative interest rate policies. While recently, some central banks were able to return to conventional monetary policy, for many countries the effectiveness of unconventional policies remains an issue. In this paper we assess diverse practices of unconventional monetary policy with a particular focus on expectations and time consistency. The principal aspect of successful policy in terms of overcoming a liquidity trap is the confidence that interest rates will remain low for a prolonged period. However, forming such expectations faces the problem of time inconsistency of optimal policy. We discuss some directions to solve this problem.

A model of the federal funds market: Yesterday, today, and tomorrow

The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves, and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before and after 2008, in a single, unified framework. We use this model to quantitatively evaluate the evolution of interest rates and trading volume in the federal funds market as the supply of aggregate reserves shrinks. We find that these outcomes are highly sensitive to the dynamics of the distribution of reserves across banks.

Unconventional U.S. Monetary Policy: New Tools, Same Channels?

In this paper, we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit/bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large-scale asset purchase programs.

Did QE lead banks to relax their lending standards? Evidence from the Federal Reserve’s LSAPs

Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks’ holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds target rate.

Monetary-fiscal policy interactions under asset purchase programs: Some comparative evidence

Using a policy-oriented multivariate VECM approach and monthly data over the period of unconventional monetary policy, this paper presents the first evidence of both long-run and short-run dynamic interactions between unconventional monetary policy and fiscal policy under central banks' large-scale asset purchase programs for the United States and Japan. Empirical results show clear differences in monetary-fiscal policy interactions between the two countries. First, our findings suggest that fiscal policy acts as the leading indicator in the monetary-fiscal policy combination in the U. S., while monetary policy acts as the leading indicator in the monetary-fiscal policy combination in Japan. Second, the impact of the BOJ's government bond purchases on monetary stock is much smaller than that of the Fed's Treasury securities purchases, suggesting differences in the transmission mechanism of unconventional monetary policy in the two countries. Lastly, compared to the U. S., the monetary-fiscal policy combination in Japan has been found to have less impact on macroeconomic variables during the period of unconventional monetary policy. This evidence suggests that monetary policy and fiscal policy reinforce each other more in their effects on the macroeconomy in the U. S.

A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow

The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves, and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before and after 2008, in a single, unified framework. We use this model to quantitatively evaluate the evolution of interest rates and trading volume in the federal funds market as the supply of aggregate reserves shrinks. We find that these outcomes are highly sensitive to the dynamics of the distribution of reserves across banks.