THE FINANCIAL MARKET EFFECTS OF UNCONVENTIONAL MONETARY POLICY
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Date
2014-01-26
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Johns Hopkins University
Abstract
In late 2008, the Federal Open Market Committee (FOMC)—the committee within the Federal Reserve that sets monetary policy—reduced the target federal funds rate to a range of 0 to ¼ percent. The target range has remained unchanged since, and the FOMC has sought to provide additional monetary stimulus through purchases of longer-term securities and forward guidance on the future path of the target rate. This dissertation assesses the financial market effects of these unconventional monetary policies.
In the first chapter, co-authored with Joseph Gagnon, Julie Remache, and Brian Sack, I explain how the first round of the Federal Reserve’s large-scale asset purchases—conducted between late 2008 and early 2010—were implemented, and discuss the mechanisms through which they might affect financial markets and the economy. I present evidence from event studies and time series regressions that the purchases led to reductions in longer-term interest rates on a range of securities, including securities not purchased by the Federal Reserve.
In the second chapter, I consider the effects of the date-based forward guidance that the FOMC used between August 2011 and December 2012. Using distributions of investors’ short-term interest rate expectations derived from interest rate options and survey-based measures of macroeconomic surprises, I find the date-based guidance led to a significant change in investors’ perceptions of the FOMC’s reaction function. This finding is robust to various regression specifications and the use of alternative options contracts and methods for extracting distributions of expectations from them.
In the third chapter, I use the method of “identification through heteroskedasticity” to estimate the effects of the unconventional monetary policies on corporate bond yields—and by extension credit spreads—across a range of credit ratings, and compare these to estimates of the effects of conventional monetary policy. My results provide some support to the hypothesis that Federal Reserve asset purchases have a larger impact on highly-rated corporate bonds that embed a safety premium than on lower-rated corporate bonds that do not. The results are largely robust to the use of alternative measures of corporate yields, an alternative method for identifying the effects of monetary policy shocks, and alternative response windows.
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Monetary policy, financial markets