Alexander Eiermann and Hossein S. Kazemi
The U.S. Federal Reserve System (the Fed) executed a series of large scale asset purchase programs---colloquially dubbed Quantitative Easing (QE)---to support economic activity following the Financial Crisis. Starting in early 2010 and continuing through 2014, the Fed purchased a substantial sum of mortgage-backed securities and U.S. Treasury debt, causing its balance sheet to expand from just under one trillion USD to over four trillion USD. A significant empirical literature has emerged to study the impact of these financial market interventions on interest rates, asset prices, inflation, and real economic activity. These studies generally use an event study or structural vector autoregressive (SVAR) approach to model the relationships between macroeconomic variables of interest and Fed QE policy. We employ the latter method, as it is able to capture the short-to-medium run dynamic response of the U.S. economy to Fed QE policy. Previous SVAR analyses have used proxies for Fed asset purchases and have treated QE as a purely exogenous shock. Our first contribution is to use data on Fed outright purchases of government debt and mortgage-backed securities, obtained from the Federal Reserve Bank of New York (FRBNY), and instead identify QE shocks as innovations in these permanent open market operations (POMO) that are orthogonal to movements in other instruments of Fed monetary policy. Furthermore, we endogenous the Fed’s decision to engage in QE using the Qual-VAR approach of Dueker (2005). Using monthly data, we find evidence that Fed QE lowered unemployment, risk premia, mortgage rates, expanded consumer credit, and increased inflation and industrial production. These results are robust to employing different measures of inflation and instruments of conventional monetary policy.