The Signaling Channel for Federal Reserve Bond Purchases

Michael D. Bauer · Glenn D. Rudebusch

216 citations0/0 files storedRePEc: Research Papers in Economics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Economic theories and models

Abstract

Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short term interest rates. Our evidence comes from dynamic term structure models that decompose declines in yields following Fed announcements into changes in risk premia and expected short rates. To overcome problems in measuring term premia, we consider unbiased model estimation and restricted risk price estimation. We also characterize the estimation uncertainty regarding the relative importance of the signaling and portfolio balance channels.

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2009A Preferred-Habitat Model of the Term Structure of Interest Rates 2012The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases 2011The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment 2012What does Monetary Policy do to Long‐term Interest Rates at the Zero Lower Bound?2011Let’s Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2 2010The Financial Market Impact of Quantitative Easing

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2016ECB Unconventional Monetary Policy: Market Impact and International Spillovers 2016Asset Purchase Programmes and Financial Markets: Lessons from the Euro Area 2015Monetary Policy and Real Borrowing Costs at the Zero Lower Bound 2022A Reassessment of Monetary Policy Surprises and High-Frequency Identification 2015The Response of Tail Risk Perceptions to Unconventional Monetary Policy 2017Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets 2014Tinker, Taper, QE, Bye? The Effect of Quantitative Easing on Financial Flows to Developing Countries

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