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.
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Notes
- 1.
Previous studies, however, reflect only the first waves of the recent QE programs. Little attention has been directed to the comparison of the effectiveness of QE programs over time and across economies.
- 2.
An OIS contract involves the exchange of a predefined (fixed) OIS rate based on a specific currency with one linked to a compounded (floating) overnight interbank interest rate that prevails over the life of the swap contract. In the absence of arbitrage, OIS rates reflect risk-adjusted expectations of the average policy rate over the horizon corresponding to the maturity of the swap.
- 3.
Joyce et al. (2011a, b) examine separate evidence on market functioning (e.g., bid-ask spreads) to identify the role of the liquidity premium channel, but the importance of this channel appears to be small in the context of gilts. Accordingly, they argue that more emphasis can be placed on the relative importance of portfolio rebalance effects in driving bond-specific premium around QE-related announcements.
- 4.
Krishnamurthy and Vissing-Jorgensen (2011), however, concentrate only on the first five events by arguing that only small yield changes occur on the three later events.
- 5.
Krishnamurthy and Vissing-Jorgensen (2011) find that, for high-liquidity assets such as Treasuries, 2-day changes are almost the same as 1-day changes. For low-liquidity assets, the 2-day changes are almost always larger than the 1-day changes.
- 6.
By assuming that the entire announcement is a complete surprise, the event study methodology adopted in this brief is likely to underestimate the market response. Christensen and Rudebusch (2012) argue that the later announcements regarding the first round of the Federal Reserve’s QE may have been widely anticipated by the market participants.
- 7.
In alternative estimates, we specify autoregressive models with higher orders for y(GB)10. The higher order autoregressive terms, however, are jointly insignificant in most of the cases, and thus we ignore them in the final estimates.
- 8.
Fawley and Neely (2013) argue that bond markets play a relatively more important role than banks in the US and UK economies, while banks play a relatively more important role in continental Europe and Japan. Each central bank chooses methods to provide liquidity and support the financial system that reflect the structure of its respective economy.
- 9.
Krishnamurthy and Vissing-Jorgensen (2011) offer a back-of-the-envelope calculation. Suppose that the repayment rate for the next year on the $1.1 trillions of MBSs is 20 % (the Federal Reserve’s holding of MBSs is $1,118 billion on August 4, 2010), the FOMC statement implies that the Federal Reserve intends to purchase $220 billion ($1.1 trillion × 0.2) of Treasuries over the next year, $176 billion ($1.1 trillion × (1 − 0.2) × 0.2) over the subsequent year, and so on. However, in its meeting on September 21, 2011, the FOMC decides to reinvest maturing MBSs and agency debts in MBSs rather than Treasuries as previously announced in an attempt to support conditions in mortgage markets.
- 10.
Krishnamurthy and Vissing-Jorgensen (2011) assert that the market may update its perception of QE2 not only on Federal Reserve’s announcement dates but also on dates of bad economic news.
- 11.
The longer-term Treasury securities purchased are funded by shorter-term Treasury securities sold, and therefore there is no money creation.
- 12.
See the BOE’s February Inflation Report (2009) and the press conference transcript via:
http://www.bankofengland.co.uk/publications/Pages/inflationreport/ir0901.aspx
- 13.
- 14.
- 15.
The US Fed typically monitors its unconventional monetary policy measures for at least half a year, and undertakes another big stimulus if it is necessary.
- 16.
Prime Minister Shinzo Abe campaigns on the platform of “Abenomics,” and thus it is widely speculated that the new government would risk the BOJ’s independences (Fawley and Neely 2013). The ruling Liberal Democratic Party even threatens to rewrite the law to make the BOJ more obedient if the central bank fails to follow quickly with bold measures to achieve the 2 % inflation target.
- 17.
The ECB defines the variable rate tender procedure as a standard tender procedure whereby the counterparties bid both the amount of money they want to transact with the central bank and the interest rate at which they want to enter into the transaction.
- 18.
The fixed-rate tender procedure is defined as a tender procedure in which the interest rate is specified in advance by the central bank and in which participating counterparties bid the amount of money they want to transact at that interest rate.
- 19.
Fawley and Neely (2013) clarify the features of the covered bonds by highlighting that covered bonds differ from other asset-backed securities in two ways. First, in the event of bond default, covered bond-holders have recourse to the issuer of the bond, as well as the underlying collateral pool (thus the term “covered”). Second, banks must hold the underlying collateral on their balance sheet, which reduces the incentives to make and securitize low-quality loans.
- 20.
Some of the Federal Reserve’s announcements regarding QE explicitly contain discussion of its policy on future federal fund rates (see Krishnamurthy and Vissing-Jorgensen 2011).
- 21.
As early as 2001, the BOJ makes a clear commitment to maintaining its virtually zero interest rate policy until the core CPI registering stably zero percent or a year-on-year increase is met. This innovative monetary policy tool is nowadays often referred to as “forward guidance” (see Shirai 2013).
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Hausken, K., Ncube, M. (2013). The Impact of Quantitative Easing on Interest Rates. In: Quantitative Easing and Its Impact in the US, Japan, the UK and Europe. SpringerBriefs in Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-9646-5_4
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