scholarly journals An agency problem in the MBS market and the solicited refinancing channel of large-scale asset purchases

2015 ◽  
Vol 2015 (027) ◽  
pp. 1-50
Author(s):  
John Kandrac ◽  
◽  
Bernd Schlusche
Keyword(s):  
Large Scale ◽  
Agency Problem ◽  
Asset Purchases

The non-linear effects of the Fed asset purchases

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Alessio Anzuini
Keyword(s):  
Financial Markets ◽  
Large Scale ◽  
Balance Sheet ◽  
Monetary Economics ◽  
American Economic Review ◽  
Vector Autoregressive ◽  
Portfolio Balance ◽  
State Dependent ◽  
Linear Effects ◽  
Asset Purchases

Abstract The Federal Reserve responded to the great financial crisis deploying new monetary policy tools, the most notable of which being the expansion of its balance sheet. In a recent paper, Weale, M., and T. Wieladek. 2016. “What Are the Macroeconomic Effects of Asset Purchases?” Journal of Monetary Economics 79 (C): 81–93 show that the asset purchases were effective in stimulating economic activity as well as inflation and asset prices. Here I show that their results are state dependent: large scale asset purchase are effective only when financial markets are impaired. Financial markets are under stress when the effective risk-bearing capacity of the financial sector is drastically reduced, i.e. when the excess bond premium (EBP) of Gilchrist, S., and E. Zakrajšek. 2012. “Credit Spreads and Business Cycle Fluctuations.” The American Economic Review 102 (4): 1692–72 exceed a certain threshold. Using an estimated threshold vector autoregressive model conditional on the EBP regime, I show that an increase in the balance sheet has expansionary effects on GDP and inflation when EBP is high, but not when it is low (as its effects become mostly insignificant). I argue that the high EBP can be interpreted as a proxy of market dis-functioning so that only when this channel of transmission is on, the unconventional policy is particularly effective. This suggests that models of transmission of unconventional policies, based on asset purchases, should focus also on the market functioning channel and not only on the portfolio balance one.

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