Asset purchase policies and portfolio balance effects

Harrison, R. J.; Chadha, Jagjit S.; Holly, Sean

doi:10.1017/cbo9781139044233.005

Cited by 15 publications

(21 citation statements)

References 12 publications

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“…In particular, our calibrated value λ a = 2 implies about a 4 bps reduction in the 10-year yields in the U.S. economy following a $100 billion asset purchase in the United States, consistent with the average value of their estimates. 15 For the elasticity of substitution between domestic and foreign assets, we combine the short-and long-term UIP conditions (see equations (24) and (25)) assuming that λ S and λ L are equal to each other, and regress the deviations from UIP (i.e., the difference between the nominal depreciation rate and the lagged interest rate differential) on the share of foreign bonds in the ROW portfolio. The data on domestic and foreign debt securities come from the Bank for International Settlements (BIS), the sample period is 1989Q4-2013Q4, and the ROW data capture all countries except the United States.…”

Section: Calibrationmentioning

confidence: 99%

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International Spillovers of Large-Scale Asset Purchases

Alpanda

Kabaca

2019

Journal of the European Economic Association

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This paper evaluates the international spillover effects of large-scale asset purchases (LSAPs) using an estimated two-country dynamic stochastic general-equilibrium model with nominal and real rigidities and portfolio balance effects. Portfolio balance effects arise from imperfect substitutability between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs in the United States lower long-term yields and stimulate economic activity not only in the United States, but also in the rest of the world (ROW) economy. This occurs despite the currency appreciation in the ROW and the resulting deterioration in their trade balance. The key for this result is the decline in the ROW term premia through the portfolio balance channel, as the relative demand for ROW long-term bonds increases following an LSAP in the United States. Our model indicates that US asset purchases that generate the same output effect as US conventional monetary policy has larger international spillovers due to stronger portfolio balance effects. We also show that international openness in financial markets reduces the stimulatory effects of LSAPs in the originating country, while increasing their international spillover effects.

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Section: Calibrationmentioning

confidence: 99%

“…Their long-term rates would thus fall more as well, as a result of a larger decrease in current and expected short-term rates. 24…”

Section: The Impact Of a Qe Shockmentioning

confidence: 99%

International Spillovers of Large-Scale Asset Purchases

Alpanda

Kabaca

2019

Journal of the European Economic Association

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“…Similar stories based on segmentation of the markets for long-and shortterm assets are explored in Vayanos and Vila (2009), Harrison (2011), Harrison (2012, and Ellison and Tischbirek (2014). Yet there remains no widelyaccepted conceptual approach for understanding why a portfolio balance effect might deliver meaningful stimulus.…”

Section: Quantitative Easingmentioning

confidence: 99%

Fiscal and Monetary Policies after the Crises

Brendon¹,

Corsetti²

2017

Economics Without Borders

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We review the recent literature on macroeconomic stabilization policy, with a particular focus on two major challenges that are particular to the post-crisis landscape. These are, first, how to provide meaningful economic stimulus when the zero lower bound on nominal interest rates is binding. Second, how to design a stabilization policy for the Eurozone that will remedy the large macroeconomic imbalances among member states.

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“…Thus, the stimulus provided to the economy by the simulated asset purchases by the Fed and the BoE is significantly larger with a constrained policy rate (solid red line) than with a free policy rate (dashed black line). As stressed by Harrison (2012a), this provides a motivation for the implementation of large asset purchases by the central bank when the policy rate is constrained by the ZLB. 17 This paper has developed a DSGE model capable of evaluating some of the effects of large purchases of treasuries by central banks.…”

Section: Sensitivity Analysis: Constrained Vs Unconstrained Policy Ratementioning

confidence: 99%

“…The positive effect on the macroeconomic variables is 1.25 percent for output and 0.49 percent for inflation. Chen et al (2012) and Harrison (2012a) can be ascribed to the presence of the budget constraint with secondary market, which generates higher effects on output and inflation in response to an asset purchase shock. 15 Not surprisingly, given the different amount of assets purchased, the overall effect of large asset purchases on the economy is found to be larger in the UK than in the US.…”

Section: The Impact Of Asset Purchasesmentioning

confidence: 99%

Evaluating quantitative easing: a DSGE approach

Falagiarda

2014

IJMEF

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This paper develops a simple Dynamic Stochastic General Equilibrium (DSGE) model capable of evaluating the effect of large purchases of treasuries by central banks. The model exhibits imperfect asset substitutability between government bonds of different maturities and a feedback from the term structure to the macroeconomy. Both are generated through the introduction of portfolio adjustment frictions. As a result, the model is able to isolate the portfolio rebalancing channel of Quantitative Easing (QE). This theoretical framework is employed to evaluate the impact on yields and the macroeconomy of large purchases of medium-and long-term treasuries recently carried out in the US and UK. The results from the calibrated model suggest that large asset purchases of government assets had stimulating effects in terms of lower long-term yields, and higher output and inflation.The size of the effects is nevertheless sensitive to the speed of the exit strategy chosen by monetary authorities.

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Asset purchase policies and portfolio balance effects

Cited by 15 publications

References 12 publications

International Spillovers of Large-Scale Asset Purchases

International Spillovers of Large-Scale Asset Purchases

Fiscal and Monetary Policies after the Crises

Evaluating quantitative easing: a DSGE approach

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