DOI: https://doi.org/10.52903/wp2022299
THE EFFECTS OF FEDERAL RESERVE’S QUANTITATIVE EASING AND BALANCE SHEET NORMALIZATION POLICIES
ON LONG-TERM INTEREST RATES
Sophocles N. Brissimis
University of Piraeus and Bank of Greece
Evangelia A. Georgiou
Bank of Greece and University of Piraeus
Abstract
This paper develops a macro-finance term structure model based on the expectations hypothesis extended to include a time-varying term premium. The model establishes inter alia the link between quantitative easing and the term premium, allowing us to measure the total impact on the bond yield of all phases of the Fed’s unconventional monetary policy implementation, including balance sheet expansion and normalization. Furthermore, by focusing on the long-run behavior of the model, an estimate of the equilibrium real interest rate is derived capturing longer-run macroeconomic trends, including the Fed’s, pre-financial crisis, balance-sheet trend.
JEL classification: E43, E44, E52, E58
Keywords: Quantitative easing, balance sheet normalization, term structure, time-varying term premium, equilibrium real interest rate
Acknowledgements: We would like to thank Alexandros Bechlioulis, Gikas Hardouvelis, Nicholas Magginas, Theodore Pelagidis and Elias Tzavalis for helpful comments and suggestions. The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece, the ECB or the Eurosystem.
Correspondence:
Evangelia A. Georgiou
Economic Analysis and Research Department
Bank of Greece
21 El. Venizelos Av., 10250
Athens, Greece
Tel.:0030-210-3203615
E-mail address: egeorgiou@bankofgreece.gr