The Effects of Quantitative Easing: Taking a Cue from Treasury Auctions

Yuriy Gorodnichenko, Walker Ray

NBER Working Paper No. 24122
Issued in December 2017, Revised in March 2018
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

To understand the effects of large-scale asset purchase programs recently implemented by central banks, we study how markets absorb large demand shocks for risk-free debt. Using high-frequency identification, we exploit the structure of the primary market for U.S. Treasuries to isolate demand shocks. These shocks are sizable, leading to large movements in Treasury yields and impacting corporate borrowing rates. Informed by a preferred habitat model of the term structure, we test for “local” demand effects and find evidence consistent with theoretical predictions. Crucially, this local effect is strongest when financial markets are disrupted. Our estimates are consistent with the view that quantitative easing worked mainly via market segmentation, with a potentially limited role for other channels.

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Document Object Identifier (DOI): 10.3386/w24122

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