Research Summary
The research paper investigates the macroeconomic effects of large-scale asset purchases (LSAPs) by the Federal Reserve. It uses a structural VAR with survey-based measures of LSAP policy stance and high-frequency yield changes as instruments. The study finds that a $500 billion LSAP shock increases output and the price level by approximately 1.2% and 0.8% respectively, while reducing the unemployment rate by 0.5 percentage points. The paper emphasizes the importance of public understanding of the Federal Reserve’s balance sheet policies in assessing the effects of LSAPs.
Key Takeaways
Impact of LSAPs on Macroeconomy
- Stimulative Effects of LSAPs: The research shows that asset purchase shocks have significant stimulative effects on the macroeconomy, raising industrial production, the consumer price index (CPI), and reducing the unemployment rate.
- Transmission through Asset Prices and Bank Lending: The LSAP shock operates through asset prices and bank lending, with the majority of asset purchase programs being systematic policy responses rather than policy shocks.
- Persistence of Effects on Equity Prices and Bank Loans: The decline in Treasury yields and term premiums appears to be short-lived, while the decline in excess bond premiums and the rise in equity prices and bank loans are more persistent.
Methodology and Robustness of Findings
- Use of Survey-Based Measures and High-Frequency Asset Price Changes: The paper discusses the use of survey-based measures and high-frequency asset price changes as external instruments to identify structural shocks in a VAR model.
- Robustness Analyses: The paper conducts extensive robustness analyses and shows that the results hold under alternative specifications and sample periods.
- Contribution to Literature: The findings contribute to the literature on the efficacy of unconventional monetary policy measures and provide new evidence on the macroeconomic effects of LSAPs.
Challenges in Assessing the Effects of Balance Sheet Policies
- Distinguishing Exogenous Innovations from Endogenous Responses: One of the challenges in assessing the effects of balance sheet policies is distinguishing exogenous innovations from endogenous responses.
- Measuring the Balance Sheet Policy Stance Accurately: Another challenge is accurately measuring the balance sheet policy stance.
- Proposed Solution: The study proposes a survey-based measure of the expected size of the Fed’s balance sheet to capture the expansionary effects of both announced and expected asset purchases.
Comparison with Previous Studies
- Comparison of Approach: The authors compare their approach to previous studies that have used surveys and asset price movements to assess the effects of asset purchases and monetary policy shocks.
- Introduction of Quantity-Based Measure of LSAP Policy Stance: The paper introduces a quantity-based measure of LSAP policy stance, allowing for a direct link between asset purchases and the macroeconomy.
- Use of High-Frequency Changes in Money Market Futures Rates and Treasury Yields: The methodology involves using high-frequency changes in money market futures rates and Treasury yields as instruments to identify shocks.
Actionable Insights
- Importance of Public Understanding: The research highlights the importance of the public’s understanding of the Federal Reserve’s balance sheet policies in assessing the effects of LSAPs. This suggests a need for clear communication and transparency from the Federal Reserve.
- Investigate the Potential of LSAPs: Given the significant stimulative effects of LSAPs on the macroeconomy, policymakers and economists should further investigate the potential of LSAPs as a tool for economic stimulus.
- Consideration of Systematic Policy Responses: The research shows that the majority of asset purchase programs are systematic policy responses rather than policy shocks. This suggests that policymakers should consider the systematic nature of these responses when designing and implementing such programs.
