Yield Curve Control Research Articles

The Effect of Fiscal Programs with Money Financing and Yield Curve Control

We study monetary policy in a model where long-term interest rate variability dampens the fiscal multiplier. A fixed money supply limits this variability. Moreover, a flexible money supply rule that only responds to government spending, and is otherwise fixed, further amplifies the fiscal multiplier and improves household welfare. Yield curve control, or reserve management by the central bank to reduce long-term rate variability, is most effective when the money supply responds endogenously to support a Taylor rule interest rate policy. In the fixed and flexible money supply cases, there is limited fiscal multiplier amplification at the zero lower bound.

The Nelson-Siegel Decay Factor in a Low Interest Rate Environment

This study examines the two-decade-long low interest rate environment in Japan using the Nelson-Siegel yield curve framework emphasizing the role of decay factor. We find that the decay factor has declined particularly after the global financial crisis, pushing down the entire yield curve as well as the conditional variance of bond yield in Japan. The decay factor was very low when BOJ’s yield curve control started in 2016 and remained low with small fluctuations since. Decay factor shocks can be interpreted as long-dated term premium shocks, and these shocks tend to decrease with BOJ’s bond purchases, controlling for other possible factors that affect term premia such as business cycles and economic uncertainty.

The Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial Institutions

On 21st September, 2016, the Bank of Japan (BOJ) embarked on a new unconventional monetary policy called yield curve control (YCC). We show that YCC creates an arbitrage opportunity in an otherwise frictionless and arbitrage-free government bond market which financial institutions can exploit. This arbitrage creates a wealth transfer from the BOJ to these financial institutions. We estimate the lower bound on this wealth transfer for the first 28 months to be $5.25 billion or [Formula: see text]582.32 billion, which constitutes an unexplored policy externality. This corresponds to 7.49% per annum on the notional employed in this arbitrage strategy.

Transmission of Japanese government bond and swap markets under negative interest rate policy

The transmissions from Japanese government bond (JGB) to swap in the maturities of four, five and ten years are confirmed under the regime of negative interest rate policy before the introduction of yield curve control (YCC). This means that the market function only works in the maturities of four, five and ten years. After the Bank of Japan (BOJ) introduces YCC policy under negative interest rate policy, the transmissions from JGB to swap are confirmed in all maturities except for two years. This means that the market function works in the maturities of three, four, five, seven and ten years under YCC policy with negative interest rate policy regime. Comparing before and after the introduction of YCC, the transmissions from JGB to swap are stronger after the introduction of YCC. The market function gradually recovers with the introduction of YCC because market participants assume that long-term interest rates will move above the level of 0% with more volatilities. More than 90% of JGBs are held by domestic investors. Thus, JGB and swap markets are less influenced by other international markets.

Transmission of Japanese government bond and swap markets under negative interest rate policy

The transmissions from Japanese government bond (JGB) to swap in the maturities of four, five and ten years are confirmed under the regime of negative interest rate policy before the introduction of yield curve control (YCC). This means that the market function only works in the maturities of four, five and ten years. After the Bank of Japan (BOJ) introduces YCC policy under negative interest rate policy, the transmissions from JGB to swap are confirmed in all maturities except for two years. This means that the market function works in the maturities of three, four, five, seven and ten years under YCC policy with negative interest rate policy regime. Comparing before and after the introduction of YCC, the transmissions from JGB to swap are stronger after the introduction of YCC. The market function gradually recovers with the introduction of YCC because market participants assume that long-term interest rates will move above the level of 0% with more volatilities. More than 90% of JGBs are held by domestic investors. Thus, JGB and swap markets are less influenced by other international markets.

Long‐term interest rates under negative interest rate policy: Analysis of Japanese government bond and swap markets

AbstractMarket segmentation is observed in the Japanese government bond (JGB) and swap markets of 2‐, 3‐, 4‐, 5‐, 7‐, and 10‐year maturities under negative interest rate policy regime. This also means that the arbitrage between the JGB and swap markets does not work in these maturities. After the Bank of Japan introduces a yield curve control policy under negative interest rate policy, market segmentation is observed only in the JGB and swap markets of 7‐ and 10‐year maturities. In the maturities of 2, 3, 4, and 5 years, the JGB yield and the swap rate co‐move. The market function recovers and arbitrage works between the JGB and swap markets in these maturities.

Return of the Bond-Price Support Regime: Bank of Japan’s Dual Bond-Purchase Program

This is one of the first studies that analyze the Bank of Japan's (BOJ) innovation in yield curve control since 2016. BOJ imposes yield caps by making its bond purchases endogenous to market yields through both fixed-amount and fixed-price (i.e., unlimited-amount) operations. Investors' JGB yield expectations converge across the entire yield curve under YCC, although 10-year LIBOR swap rates are not immediately affected by fixed-price JGB operations. Both long and short-term JGB yields become stationary and less volatile when the yield caps are binding, but they become non-stationary and volatile when negative market yields make the yield caps slack.

The Impact of Quantitative and Qualitative Easing with Yield Curve Control on the Term Structure of Interest Rates: Evidence from Micro-Level Data

We investigate the effect of quantitative and qualitative easing (QQE) conducted by the Bank of Japan (BOJ) on the Japanese Government Bond (JGB) price using micro-level panel data. Our paper takes advantage of the policy changes in the open market operation under QQE, where the BOJ predetermines the schedule of the operation after March 2017, which suggests that the purchases by the BOJ are an exogenous shock without surprise. Utilizing this ideal setup, we empirically show that the impact of the demand factor on the term structure significantly affects the JGB price, which supports the market segmentation theory.

Do Fixed-Rate Purchase Operations by the Bank of Japan Control the Yield Curve? Evidence from High-Frequency Data

This is the first study known to analyze fixed-rate purchase operations by the Bank of Japan (BOJ), as conducted under the policy of Quantitative and Qualitative Easing (QQE) with Yield Curve Control (YCC). On February 3, 2017, the BOJ conducted the first unlimited purchase of 10-year Japanese government bonds (JGB). We interpret this new operation as an attempt to convert the nonstationary process into a stationary process, and using intraday data empirically show that the BOJ successfully stabilized the JGB yield as a result.

The Distributional Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial Institutions

On September 21st, 2016, the Bank of Japan (BOJ) embarked on a new unconventional monetary policy, called yield curve control (YCC). We show that YCC creates an arbitrage opportunity in an otherwise frictionless and arbitrage-free government bond market which financial institutions can exploit. This arbitrage creates a wealth transfer from the BOJ to these financial institutions. We estimate a lower bound on this wealth transfer for the first 28 months to be $5.25 billion or 582.32 billion yen, which constitutes an unexplored policy externality. This corresponds to 7.49 percent per annum on the notional employed in this arbitrage strategy.

The Fed’s Yield-Curve-Control Policy

The recent global financial crisis left governments in many advanced countries with very heavy debt burdens and their central banks with huge portfolios of government bonds. With many central banks today still facing policy rates that are uncomfortably close to zero, some may follow the example of Japan, which recently added a new long-term interest-rate target to its short-term target to give itself "yield-curve control." The Federal Reserve's foray into similar territory around the Second World War suggests that combining yield-curve control with quantitative easing when government borrowing needs are substantial can create constraints on monetary policy that are not easily removed.