Journal Article

QE: is there a portfolio balance effect?

Abstract: The Federal Open Market Committee has recently attempted to stimulate economic growth using unconventional methods. Prominent among these is quantitative easing (QE)?the purchase of a large quantity of longer-term debt on the assumption that it will reduce long-term yields through the portfolio balance channel. Former Federal Reserve Chairman Ben Bernanke and others suggest that QE works through the portfolio balance channel, which implies a strong, statistically significant positive relationship between the public?s holding of long-term Treasury debt and long-term Treasury yields. The author uses the econometric approach of Gagnon et al. (2011) and others to investigate the relationship between a variety of measures of the public?s debt holding and various yield measures in the literature. The empirical results provide virtually no support for the portfolio balance channel.

JEL Classification: E43; E52; E44; E58;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2014

Volume: 96

Issue: 1

Pages: 55-72