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Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion

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Abstract

This note explores the substitutability between policy rate hikes and reductions in the size of the Federal Reserve's balance sheet for the removal of policy accommodation. We do so using a version of the FRB/US model augmented to incorporate the effects of changes in the Federal Reserve's asset holdings on term premiums.

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  • Edmund Crawley & Etienne Gagnon & James Hebden & James Trevino, 2022. "Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion," FEDS Notes 2022-06-03-2, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfn:2022-06-03-2
    DOI: 10.17016/2380-7172.3147
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    File URL: https://www.federalreserve.gov//econres/notes/feds-notes/substitutability-between-balance-sheet-reductions-and-policy-rate-hikes-some-illustrations-20220603.htm
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    Cited by:

    1. Altavilla, Carlo & Gürkaynak, Refet S. & Quaedvlieg, Rogier, 2024. "Macro and micro of external finance premium and monetary policy transmission," Journal of Monetary Economics, Elsevier, vol. 147(S).
    2. repec:ocp:ppaper:pb42-22 is not listed on IDEAS
    3. Patrick Gruning & Andrejs Zlobins, 2023. "Quantitative Tightening: Lessons from the US and Potential Implications for the EA," Working Papers 2023/09, Latvijas Banka.
    4. Bin Wei, 2022. "Quantifying "Quantitative Tightening" (QT): How Many Rate Hikes Is QT Equivalent To?," FRB Atlanta Working Paper 2022-8, Federal Reserve Bank of Atlanta.
    5. Chaitri Gulati & Andrew Lee Smith, 2022. "The Evolving Role of the Fed’s Balance Sheet: Effects and Challenges," Economic Review, Federal Reserve Bank of Kansas City, vol. 107(no.4), November.
    6. Bin Wei, 2022. "How Many Rate Hikes Does Quantitative Tightening Equal?," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2022(11), July.

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