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The Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial Institutions

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  • Robert Jarrow

    (S.C. Johnson Graduate School of Management, Cornell University, Ithaca, N.Y. 14853, USA2Kamakura Corporation, Honolulu, Hawaii 96815, USA)

  • Sujan Lamichhane

    (Johns Hopkins Carey Business School, Baltimore, M.D. 21202, USA)

Abstract

On 21st September, 2016, the Bank of Japan (BOJ) embarked on a new unconventional monetary policy called yield curve control (YCC). We show that YCC creates an arbitrage opportunity in an otherwise frictionless and arbitrage-free government bond market which financial institutions can exploit. This arbitrage creates a wealth transfer from the BOJ to these financial institutions. We estimate the lower bound on this wealth transfer for the first 28 months to be $5.25 billion or ¥582.32 billion, which constitutes an unexplored policy externality. This corresponds to 7.49% per annum on the notional employed in this arbitrage strategy.

Suggested Citation

  • Robert Jarrow & Sujan Lamichhane, 2020. "The Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial Institutions," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 1-38, March.
    • Handle: RePEc:wsi:qjfxxx:v:10:y:2020:i:01:n:s2010139220500044
    DOI: 10.1142/S2010139220500044
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    References listed on IDEAS

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    Cited by:

    1. Bogdan Andrei TILIUȚĂ & Ioana Raluca DIACONU, 2021. "Coronavirus - The Moment for Helicopter Money?," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 12(4), pages 244-256, February.

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