Quantifying the macroeconomic effects of large-scale asset purchases

Karl Walentin 11 September 2014

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Central banks have used various unconventional monetary policy tools since the onset of the financial crisis yet the debate continues regarding their efficiency. This column attempts to shed light on the ‘bang for the buck’, or the macroeconomic effects, of one such unconventional monetary policy – the Federal Reserve’s large-scale asset purchases of mortgage-backed securities employed during the Fed’s QE1 and QE3 programs.

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Topics:  Global crisis Monetary policy

Tags:  monetary policy, unconventional monetary policy, large-scale asset purchases, central banking, financial crisis, Federal Reserve, quantitative easing, mortgage-backed securities, term premia, zero lower bound, interest rates, US, UK, Sweden, mortgages, global crisis

What were they thinking? The Federal Reserve in the run-up to the 2008 financial crisis

Stephen Golub, Ayse Kaya, Michael Reay 08 September 2014

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Financial crises are caused by imprudent borrowing and lending, but as former Federal Reserve chairman William McChesney Martin noted, it is ultimately up to regulators to ‘take away the punch bowl’ when the larger economy is at risk. Indeed, many have criticised regulators for failing to anticipate and prevent the 2008 crash (Buiter 2012, Gorton 2012, Johnson and Kwak 2010, Roubini and Mihm 2010). Little work has been done, however, on why regulatory agencies failed to act despite warnings from prominent commentators (Borio and White 2004, Buffett 2003, Rajan 2005).

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Topics:  Financial markets Global crisis Monetary policy

Tags:  financial crisis, Federal Reserve, FOMC, global crisis, collateralised debt obligations, Credit Default Swaps, LTCM, CDOs, CDSs, central banking

What are the macroeconomic effects of asset purchases?

Martin Weale, Tomasz Wieladek 10 June 2014

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After policy rates fell close to zero in response to the global financial crisis of 2008-09, the scope for further conventional monetary policy easing was exhausted. As a result, both the Bank of England and the Federal Reserve embarked on large-scale asset purchases of government and financial securities (see Figures 1 and 2).

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Topics:  Monetary policy

Tags:  inflation, Federal Reserve, Phillips curve, Bank of England, quantitative easing, unconventional monetary policy, output

The transmission of Federal Reserve tapering news to emerging financial markets

Joshua Aizenman, Mahir Binici, Michael M Hutchison 04 April 2014

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The quantitative easing (QE) policies of the US Federal Reserve in the years following the crisis of 2008–2009 included monthly securities purchases of long-term Treasury bonds and mortgage-backed securities totalling $85 billion in 2013. The cumulative outcome of these policies has been an unprecedented increase of the monetary base, mitigating the deflationary pressure of the crisis.

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Topics:  Exchange rates International finance Monetary policy

Tags:  exchange rates, Federal Reserve, asset prices, emerging markets, stock markets, Credit Default Swaps, tapering

Turmoil in emerging markets: What’s missing from the story?

Kristin Forbes 05 February 2014

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Emerging markets are going through another period of volatility – and the most popular boogeyman is the US Federal Reserve.

The basic storyline is that less accommodative US monetary policy has caused foreign investors to withdraw capital from emerging markets, causing currency depreciations, equity declines, and increased borrowing costs. In many cases, these adjustments will slow growth and increase the risk of some type of crisis.

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Topics:  International finance

Tags:  Federal Reserve, capital flows, emerging markets, global financial crisis, tapering

Unconventional monetary policy normalisation and emerging-market capital flows

Andrew Burns, Mizuho Kida, Jamus Lim, Sanket Mohapatra, Marc Stocker 21 January 2014

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Quantitative easing (QE), which started in 2008, swelled the Federal Reserve’s balance sheet to an unprecedented $3.4 trillion. In May 2013, the Fed announced that it would evaluate the possibility of a reversal of its unconventional monetary policies – QE in particular .

The event, which has come to be known as ‘tapering’, prompted a sharp, negative response from financial markets (the so-called ‘taper tantrum’):

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Topics:  Financial markets International finance Monetary policy

Tags:  Federal Reserve, quantitative easing, unconventional monetary policy, tapering

Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets

Barry Eichengreen, Poonam Gupta 19 December 2013

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In May 2013, Federal Reserve officials first began to talk of the possibility of the US central bank tapering its securities purchases from $85 billion a month to something lower. A milestone to which many observers point is 22 May 2013, when Chairman Bernanke raised the possibility of tapering in his testimony to Congress. This ‘tapering talk’ had a sharp negative impact on economic and financial conditions in emerging markets.

Three aspects of that impact are noteworthy:

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Topics:  Exchange rates Monetary policy

Tags:  exchange rates, monetary policy, Federal Reserve, emerging markets, capital controls, Macroprudential policies, Capital inflows, currency war, tapering

Dark side of housing-price appreciation

Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay 25 November 2013

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Policymakers around the world often worry about decreases in real-estate prices and other asset prices, and take measures to prevent them. For example, in the aftermath of the financial crisis, the Federal Reserve has engaged in large-scale asset purchases – especially of mortgage-backed assets – to support the housing market and, in turn, the overall economy.

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Topics:  Financial markets Monetary policy

Tags:  housing, Federal Reserve, investment, asset prices, banks, lending, real estate

Forward policy guidance at the Federal Reserve

John C. Williams 16 October 2013

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In response to the financial crisis, the Federal Open Market Committee (FOMC) lowered the target federal funds rate to essentially zero in December 2008, where it has remained. The economy, however, was still reeling, and it wasn’t possible to create additional monetary stimulus by cutting the federal funds rate further—owing to the inability of nominal interest rates to fall much below that point.

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Topics:  Monetary policy

Tags:  Federal Reserve, forward guidance

Unwinding quantitative easing

Stephen Grenville 22 June 2013

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Fed Chairman Ben Bernanke’s prepared statement on 22 May was the epitome of even-handed non-committal drafting (Federal Reserve 2013b) but the mention of "stepping down" and "in the next few meetings" in the discussion sent a shiver through financial markets worldwide. Bond yields jumped just about everywhere; the Abenomics euphoria in Japan deflated; and capital flows to emerging markets reversed direction. Bernanke was just pointing out the obvious and he went on to say that “we could either raise or lower our pace of purchases going forward”. Why were financial markets so startled?

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Topics:  Global crisis International finance

Tags:  Federal Reserve, Bernanke, QE

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