Unconventional Monetary Policy and Long-Term Interest Rates

October 22, 2014

Preview Citation

Format: Chicago

Tao Wu. Unconventional Monetary Policy and Long-Term Interest Rates, (USA: International Monetary Fund, 2014) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the transmission mechanism through which unconventional monetary policy affects long-term interest rates. I construct a real-time measure summarizing market projections of the magnitude and duration of the Federal Reserve's Large Scale Asset Purchases (LSAP) program, and analyze the determination of term premiums and expectations of future short-term interest rates in a sample spanning more than two decades. Empirical findings suggest that the LSAP has effectively lowered the long-term Treasury bond yields, through both "signaling" and "portfolio balance" channels. On the other hand, the Fed's "forward guidance" also leads to gradual extension of market projections for the duration of the LSAP program, thereby enhancing the LSAP's effect to keep term premiums low. Estimation results also reveal a diminished effectiveness of the LSAP during QE III. Finally, model simulations underscore the importance of policy transparency in minimizing unnecessary market turbulence and ensuring a timely and smooth exit of the unconventional monetary policy stimulus.

Subject: Financial institutions, Financial services, Futures, Long term interest rates, Monetary policy, Short term interest rates, Unconventional monetary policies, Yield curve

Keywords: Exit strategy, Financial market, Futures, Large-scale asset purchases, Long term interest rates, Long-term interest rates, LSAP announcement, LSAP assets, LSAP effect, LSAP policy, LSAP program, Market participant, Portfolio balance, Quantitative easing, Short term interest rates, Signaling effect, Tapering, Term premium, Unconventional monetary policies, Unconventional monetary policy, WP, Yield curve

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/189
Stock No:

WPIEA2014189
ISBN:

9781498317245
ISSN:

1018-5941

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