Working Paper

Does Quantitative Easing Affect Market Liquidity?

Abstract: The second round of large-scale asset purchases by the Federal Reserve?frequently referred to as QE2?included repeated purchases of Treasury inflation-protected securities (TIPS). To quantify the effect QE2 had on the functioning of the TIPS market and the related market for inflation swaps, we exploit the measure of combined liquidity premiums in TIPS yields and inflation swap rates derived by Christensen and Gillan (2012). We find that, on TIPS purchase dates, the liquidity premium dropped by 8 to 11 basis points depending on maturity, or about 50 percent. Furthermore, the effect was sustained on nonpurchase dates during most of the program, but dissipated towards its end.

Keywords: Monetary; policy;

JEL Classification: E4; E52; E58; G12;

https://doi.org/10.24148/wp2013-26

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2017-09

Number: 2013-26

Pages: 46 pages