Saturday, 13 October 2018: 2:20 PM
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 2009 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 of capturing 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. We follow Dueker (2005) and Meinusch and Tillmann (2016) and treat the Fed’s decisions regarding QE as endogenous in a Qual-VAR model. Unlike Meinusch and Tillmann (2016), we focus not on purely announcement effects, but the impact of Fed Large-Scale Asset Purchase (LSAP) policy itself. To do so, we include in our analysis data on Fed outright purchases of government debt and mortgage-backed securities, obtained from the Federal Reserve Bank of New York (FRBNY). We then identify QE shocks as innovations resulting from the Fed’s unconventional policy decisions that are orthogonal to variation in Permanent Open Market Operations (POMOs) and other instruments of monetary policy. Using monthly data, we find evidence that Fed QE increased industrial production, lowered unemployment, increased inflation, and reduced financial stress. These results are robust to employing different specifications of our baseline model.