The interest rate effects of government bond purchases away from the lower bound |
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Institution: | 1. Indian Institute of Technology Madras, India;2. Madras School of Economics, India |
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Abstract: | I analyze the recent experience of unconventional monetary policy in Sweden to study the interest rate transmission mechanisms of government bond purchases when interest rates are away from the lower bound. Using dynamic term structure models and event study regressions I find that government bond purchases have important portfolio balance and signaling effects. The signaling channel operates mainly by lowering short-rate expectations in the intermediate segment of the yield curve, while the portfolio balance channel is effective in lowering longer maturity term premia. In addition, I find that target interest rate policy and government bond purchases operate in different segments of the yield curve. This suggests that a combination of the two policies can be used to lower interest rates across the whole maturity spectrum, making monetary policy more expansionary. |
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Keywords: | Quantitative easing Signaling channel Portfolio balance channel Dynamic affine term structure model Short-rate expectations Term premium E43 E44 E52 |
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