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Federal Reserve Bank of St. Louis
Review
QE: is there a portfolio balance effect?
Daniel L. Thornton
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.


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Daniel L. Thornton, "QE: is there a portfolio balance effect?" , Federal Reserve Bank of St. Louis, Review, volume 96, issue 1, pages 55-72, 2014.
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