lecture 8 - quantitative easing - hec
TRANSCRIPT
Quantitative Easing
Macro-Economic Policy
University of Lausanne
Fall 2013
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What is Quantitative Easing?
Originally used to mean continued conventional open marketoperations at zero nominal bound.Now used to mean unconventional OMO at the ZLB, such as buyinglong-term government bonds, MBS, or other assets.
I Also known as Credit Easing
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Effects on Asset Returns
Time premiumI lower medium-term real interest rates
Inflation ExpectationsI Commitment mechanism for low nominal rates, future inflation
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Effects on Asset Returns
Cash Flow RiskI DefaultI Pre-payment
Market RiskI LiquidityI Duration and pre-payment clientele effects
Risk premiaI LiquidityI SafetyI DefaultI Pre-payment
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Channels (Two period example)
rLT = iST
+E [iST ] (Signaling)
+Term premium (safety, default, liquidity, pre-payment)
�E [⇡] (Inflation)
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Event Study Analysis
Krishnamurthy and Vissing-Jorgensen (2011)I Look at intra-day dataI Reaction of asset prices around statements by FOMCI Was there an effect?I Which were the main channels?
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Rounds of Quantitative Easing
QE1 (late 2008 and 2009)I Purchase on long-term treasuries and mortgage-backed securities
QE2 (late 2010 and beyond)I Exclusive purchase of long-term treasuries ($ 85 Billion per month)
QE3 (summer 2013 and beyond)I Exclusive purchase of mortgage backed securities ( $40 Billion per
month)
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Event Study Analysis - QE1
25/11/2008 - Fed announces intention to purchase $500B of Agencymortgage-backed securities and $100B of Agency debt.01/12/2008 - Speech by Bernanke16/12/2008 - FOMC Statement29/01/2009 - FOMC Statement: Fed may buy more agency debt,MBS, and Treasuries18/03/2009 - FOMC Statement: Increase agency debt purchases by$200B, agency MBS $1.25T, $300B long-term treasuries
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Event Study Analysis - QE2
10/08/2010 - FOMC Statement: The Committee announces that itwill keep constant the Federal Reserve’s holdings of securities at theircurrent level by reinvesting principal payments from agency debt andagency mortgage-backed securities in longer-term Treasury securities21/09/2010 - FOMC Statement: The committee maintains itsexisting policy of reinvesting principal payments and will monitordevelopments, it is prepared to provide additional accommodation ifneeded to support the economic recovery.03/11/2010 - Fed will continue its existing policy and purchase $600Bof additional treasury securities. This was widely expected and so hadlittle effect.
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How to identify the channels in action?
Study the effects of quantitative easing on securities that highlight aparticular channel
I Expected future short-term rates (signaling) - Federal Funds futurescontracts
I Default risk - Credit Default Swap SpreadsI Expected Inflation - Yield on nominal safe bonds minus TIPS yield (use
a nominal bond with a similar safety premium, e.g. CDS-adjusted Aaa)
Other channels are more complexI Duration risk - Differences in announcement effect between comparable
long and short-term assetsF However, safety channel confounds movements for treasuriesF Pre-payment risk channel confounds movements for MBSF Liquidity channel confounds movements for safe corporate bonds.F Use low grade corporate bonds! (deductive argument)
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How to identify the channels in action?
Pre-payment risk in MBS - Difference between fall in MBS yields andthe signaling effect (requires that the other channels do not affectMBS)
I Critique: Couldn’t this just be like saying that the duration risk channelonly applies to MBS?...
Safety channel - Agency bond yields: QE reduces supply, but does notaffect their liquidity, or default risk.Liquidity channel - Yield spread between Treasury and agency bonds:the spread should shrink.
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QE1 Channels
Present: Signaling, pre-payment risk, default risk, safety, liquidity,inflationAbsent: Duration risk
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QE2 Channels
Absent: pre-payment risk, default risk, liquidity, duration
Present: Signaling, safety, inflation
Since QE2 did not target MBS, seems reasonable the pre-payment riskchannel would be absent.What happened to the liquidity and default risk channels?
I Perhaps QE2 was taken as a negative signal for the economy -increases default risk premium
I No purchase of lower-grade bonds means there was no direct defaultrisk effect.
I Liquidity premia happened to be low in later 2010 - so removingliquidity had a negligible effect.
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Heterogeneous Effects on the Mortgage Market
Fuster Willen (2010) - Some facts about the effects of the FederalReserve’s mortgage market investments
I Interest rates on mortgages decreasedI Refinancing increased, but not new mortgages or searchesI Borrowers with high credit scores benefitted much more from the
intervention.F Perhaps this is a good thing!
I Did credit easing boost consumption?F Unlikely, since most of the benefits went to financially unconstrained
households
I Did credit easing increase house prices?F No evidence of an increase in households considering a purchase,
increasing loan amounts, or shifts in the composition of buyers.
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Policy Critiques
Andrew Huszar (Nov 11, 2013 WSJ): Confessions of a QuantitativeEaser
I Quantitative easing is the greatest backdoor Wall Street bailout of alltime.
I Banks enjoyed huge capital gains on their securities, brokers collectedfees for the trades
I Banks did not issue more loans in response to quantitative easingI PIMCO analyst: $4Trillion investment for $40Billion return (0.25% of
GDP, 0.0001% return).
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A Third Way
Helicopter drops - direct delivery of cash into people’s handsNothing could be better to stimulate demand
I consumers feel relatively rich, so they spend moreI credit-constrained entrepreneurs can invest moreI demand for loans falls, interest rates fall.
Gains are spread around up-front, more politically popular.I The political attractiveness of this option is a major drawback!
Effective commitment to inflation by the central bankHard to get out. Once the money is in the system, how do you get itout?
I Implies major losses for the Fed. The treasury likes to receive adividend... political backlash.
What do you think?
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Summary
Two dimensions to unconventional monetary policy: quantitative andcredit easingPolicies succeeded in decreasing long-term interest rates
I which ones depends on which policy
Could think of other options...Should we be so concerned about ex-post policy making?
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