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Evaluating Quantitative Easing: The Importance of Accounting for Forward Guidance

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  • Brent Bundick
  • Andrew Lee Smith

Abstract

During the COVID-19 pandemic crisis, policymakers used large-scale asset purchases (LSAPs) along with forward guidance about the future path of the federal funds rate to help stabilize financial markets. However, policymakers and economists have yet to reach a consensus on the efficacy of LSAPs in providing accommodation and improving macroeconomic outcomes. Because announced changes in LSAPs often coincide with changes in forward guidance, the market responses to these two tools can be difficult to disentangle and each tool’s efficacy challenging to evaluate. Brent Bundick and A. Lee Smith attempt to measure the efficacy of the FOMC’s previous asset purchase programs during the Great Recession while explicitly accounting for changes in forward guidance. They find that controlling for concurrent changes in forward guidance implies a roughly 25 percent reduction in the accommodative effects of the FOMC’s first two asset purchase programs relative to estimates that do not disentangle the two tools. The effects of an asset purchase program could thus be overstated if researchers fail to account for changes in interest rate uncertainty induced by forward guidance occurring at the same time.

Suggested Citation

  • Brent Bundick & Andrew Lee Smith, 2022. "Evaluating Quantitative Easing: The Importance of Accounting for Forward Guidance," Economic Review, Federal Reserve Bank of Kansas City, vol. 107(no.3), pages 1-16, June.
    • Handle: RePEc:fip:fedker:94422
    DOI: 10.18651/ER/v107n3BundickSmith
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    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    2. Brent Bundick & Trenton Herriford, 2017. "How Do FOMC Projections Affect Policy Uncertainty?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-22.
    3. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 215-287.
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    More about this item

    Keywords

    Asset purchase programs; Large-scale asset purchases (LSAPs); Federal Open Market Committee (FOMC); Monetary policy;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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