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Does Quantitative Easing Affect Market Liquidity?

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  • Jens H. E. Christensen
  • James M. Gillan

Abstract

The second round of large-scale asset purchases by the Federal Reserve?frequently referred to as QE2?included repeated purchases of Treasury inflation-protected securities (TIPS). To quantify the effect QE2 had on the functioning of the TIPS market and the related market for inflation swaps, we exploit the measure of combined liquidity premiums in TIPS yields and inflation swap rates derived by Christensen and Gillan (2012). We find that, on TIPS purchase dates, the liquidity premium dropped by 8 to 11 basis points depending on maturity, or about 50 percent. Furthermore, the effect was sustained on nonpurchase dates during most of the program, but dissipated towards its end.

Suggested Citation

  • Jens H. E. Christensen & James M. Gillan, 2013. "Does Quantitative Easing Affect Market Liquidity?," Working Paper Series 2013-26, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2013-26
    DOI: 10.24148/wp2013-26
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    References listed on IDEAS

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    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. Joseph Haubrich & George Pennacchi & Peter Ritchken, 2012. "Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1588-1629.
    3. Joseph E. Gagnon & Matthew Raskin & Julie Remache & Brian P. Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, vol. 17(May), pages 41-59.
    4. William Dudley & Michelle Steinberg Ezer & Jennifer E. Roush, 2009. "The case for TIPS: an examination of the costs and benefits," Economic Policy Review, Federal Reserve Bank of New York, vol. 15(Jul), pages 1-17.
    5. Jens H. E. Christensen & Glenn D. Rudebusch, 2012. "The Response of Interest Rates to US and UK Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 385-414, November.
    6. Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, December.
    7. 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

    Monetary; policy;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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