The Response of Interest Rates to US and UK Quantitative Easing

Jens H. E. Christensen · Glenn D. Rudebusch

344 citations0/0 files storedThe Economic Journal

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

Abstract

We analyse declines in government bond yields following announcements by the Federal Reserve and the Bank of England of plans to buy longer term debt. Using dynamic term structure models, we decompose US and UK yields into expectations about future short‐term interest rates and term premiums. We find that declines in US yields mainly reflected lower expectations of future short‐term interest rates, while declines in UK yields appeared to reflect reduced term premiums. Thus, the relative importance of the signalling and portfolio balance channels of quantitative easing may depend on market institutional structures and central bank communication policies.

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References

1990Forecasting, Structural Time Series Models and the Kalman Filter 1987Parsimonious Modeling of Yield Curves 1996A YIELD‐FACTOR MODEL OF INTEREST RATES 2003Forecasting the Term Structure of Government Bond Yields 2000Specification Analysis of Affine Term Structure Models 2002Term Premia and Interest Rate Forecasts in Affine Models 2007The U.S. Treasury yield curve: 1961 to the present 2011The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy

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