Search Results
Working Paper
Unconventional monetary policy and the behavior of shorts
In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce long-term interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after a set of these unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, ...
Working Paper
Quantitative Easing and Financial Risk Taking: Evidence from Agency Mortgage REITs
An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) principally funded with repo debt. We show that Agency MREIT growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We also find that these institutions increased leverage during the later ...
Working Paper
Supply and demand shifts of shorts before Fed announcements during QE1–QE3
Cohen, Diether, and Malloy (Journal of Finance, 2007), find that shifts in the demand curve predict negative stock returns. We use their approach to examine changes in supply and demand at the time of FOMC announcements. We show that shifts in the demand for borrowing Treasuries and agencies predict quantitative easing. A reduction in the quantity demanded at all points along the demand curve predicts expansionary quantitative easing announcements.
Working Paper
Employment Effects of Unconventional Monetary Policy : Evidence from QE
This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. We find that banks with higher mortgage-backed securities holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3). While additional volume is concentrated in refinanced mortgages after QE1, increases are driven by newly originated home purchase mortgages and additional commercial and industrial lending after QE3. Using spatial variation, we show that regions with a high share of affected banks experienced ...
Working Paper
Quantitative Easing and Agency MBS Investment and Financing Choices by Mortgage REITs
An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) and that are principally funded with repo debt. We first show that Agency MREIT asset growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We then document that Agency MREITs increased ...
Discussion Paper
Will “Quantitative Easing” Trigger Inflation?
The Federal Reserve announced on November 3, 2010, that in the interest of stimulating economic recovery, it would purchase $600 billion of longer-term Treasury securities. The announcement led some commentators to conjecture that the Fed’s large-scale asset purchase (LSAP) program—popularly known as “quantitative easing”—is more likely to trigger inflation than stimulate recovery. This post discusses why those concerns may be misplaced, and also why they are not without some basis. A recent Liberty Street Economics post by James J. McAndrews—“Will the Federal Reserve's Asset ...
Working Paper
On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound
We construct a monetary economy in which agents face aggregate demand shocks and hetero- generous idiosyncratic preference shocks. We show that, even when the Friedman rule is the best interest rate policy, not all agents are satiated at the zero lower bound. Thus, quantitative easing can be welfare improving since it temporarily relaxes the liquidity constraint of some agents, without harming others. Moreover, due to a pricing externality, quantitative easing may also have beneficial general equilibrium effects for the unconstrained agents. Lastly, our model suggests that it can be optimal ...
Working Paper
Unconventional monetary policy and the behavior of shorts
We investigate the behavior of shorts, considered sophisticated investors, before and after a set of Federal Reserve unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, indicating shorts correctly anticipated these surprises. Shorts also systematically rebalanced after announcements in the direction of the announcement surprise when the announcement released ...
Working Paper
Unconventional monetary policy and the behavior of shorts
We investigate the behavior of shorts, considered sophisticated investors, before and after a set of Federal Reserve unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, indicating shorts correctly anticipated these surprises. Shorts also systematically adjusted their positions after announcements in the direction of the announcement surprise when the ...
Working Paper
QE: when and how should the Fed exit?
The essence of Quantitative Easing (QE) is to reduce the costs of private borrowing through large-scale purchases of privately issue debts, instead of public debts (Ben Bernanke, 2009). Notwithstanding the effectiveness of this highly unconventional monetary policy in reviving private investment and the economy, it is time to think about the likely impacts of the unwinding of QE (or the reversed private-asset purchases) on the economy. In a standard economic model, if monetary injections can increase aggregate output and employment, then the reversed action will likely undo such effects. ...