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The Transmission of Unconventional Monetary Policy

The Transmission of Unconventional Monetary Policy

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Published by zerohedge
The Transmission of Unconventional Monetary Policy
The Transmission of Unconventional Monetary Policy

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Published by: zerohedge on Aug 23, 2013
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10/02/2013

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1
The Ins and Outs of Large Scale Asset Purchases
Question: How to optimally manage an exit?
 Exit = Cessation of purchases and/or sale of Fed portfolio
1.Mechanics: Which asset prices will be most affected? Are salesand cessation of purchases conceptually different?2.Expectations: How do exit announcements affect dynamics of asset prices?
Note:We do not discuss whether or not exit is currently optimal.We study how to optimally manage an exit.
Arvind Krishnamurthy 
 
 
2
 
RESULTS
Mechanics:i.
 
Purchases (sales) mostly affect the price of the assets purchaseda.
 
Treasury purchases lower government borrowing rates, with limitedprivate sector spilloverb.
 
MBS purchases lower household mortgage ratesii.
 
MBS purchases:
“cheapest to deliver” scarcity channel.
 a.
 
Key factor is expected flow of purchases;
Cessation
 
 
Sales
 Optimal exit sequence:1.
 
Cease Treasury purchases;2.
 
Sell Treasury portfolio;3.
 
Sell older MBS;4.
 
Cease new MBS purchasesExpectations and Policy Rule:iii.
 
LSAPs target the prices of long-term assets (conventional monetary policytargets short-term assets)a.
 
Long-term asset prices are forward lookingb.
 
Asset prices highly sensitive to expectations over LSAP evolutioniv.
 
Exit Rules versus Discretiona.
 
Fed has chosen discretion for LSAPs based on uncertainties over LSAPtransmission mechanismb.
 
Rules matter more for LSAPs. Uncertainties also with low rate policy.c.
 
Why not lay out LSAP exit (and entry) rule?
 
 
3
 
Mechanics: Purchases mostly affect the price of the assets purchased
Strip out signaling effects using fed funds futures contracts
“shift”
 Notes for figure
 
Yield curves from fed funds futures, pre- and post-QE1 event days
 
 
Shift of one-month, indicates each QE1 announcement shiftedexpectations of rate hike by one-month.
 

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