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Evidence on the portfolio balance channel of quantitative easing

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  • Daniel L. Thornton
Abstract
With its interest rate instrument at the zero lower bound, the Federal Open Market Committee has turned to unconventional methods to stimulate economic growth and increase employment. Prominent among these is quantitative easing (QE)?the purchase of a large quantity of longer-term debt. Policymakers and analysts have argued that QE works through the so-called portfolio balance channel: it reduces long-term yields by reducing the term premium investors require to hold long-dated securities. I present several reasons to be skeptical of the theoretical foundations of this portfolio balance channel and offer several arguments for why the effect of QE might be relatively small even if it is theoretically valid. Consistent with these arguments, an empirical analysis using a variety of interest rate variables and public debt supply measures used in the literature finds essentially no support for the portfolio balance channel.>

Suggested Citation

  • Daniel L. Thornton, 2012. "Evidence on the portfolio balance channel of quantitative easing," Working Papers 2012-015, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2012-015
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    Cited by:

    1. Herrenbrueck, Lucas, 2014. "Quantitative Easing and the Liquidity Channel of Monetary Policy," MPRA Paper 70686, University Library of Munich, Germany, revised 10 Apr 2016.
    2. Chadha, Jagjit S. & Waters, Alex, 2014. "Applying a macro-finance yield curve to UK quantitative Easing," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 68-86.
    3. Lüdering, Jochen & Tillmann, Peter, 2020. "Monetary policy on twitter and asset prices: Evidence from computational text analysis," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Chien-Chiang Wang, 2023. "Asset Market Frictions, Household Heterogeneity, and the Liquidity Theory of the Term Structure," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 67-99, January.
    5. Alexandros Kontonikas & Charles Nolan & Zivile Zekaite, 2015. "Always and Everywhere Inflation? Treasuries Variance Decomposition and the Impact of Monetary Policy," Working Papers 2015_17, Business School - Economics, University of Glasgow.

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    Keywords

    Monetary policy - United States; Economic conditions;

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