The Effectiveness of the Fed’s Quantitative Easing Policy: New Evidence Based on Interest Rate Differentials

This paper explores the effects of non-standard monetary policies on international yield relationships. We first document that long-term rates followed a common global downward trend that had already manifested itself prior to the financial crisis. The bond-buying operations (commonly dubbed Quantitative Easing (QE)) of the US Federal Reserve did not disturb this global co-movement – i.e. the global downward trend in interest rates. We model the relationship between USD and euro (riskless) long-term interest rates using a Cointegrated Vector Autoregressive Model (CVAR) employing recursive estimation methods. We find no evidence that QE1 (or the QE episodes) destabilized the transatlantic interest-rate relationship, nor the relationship between interest rates and the US dollar exchange rate. A robustness test using a Vector Autoregressive Model (VAR) with interest rates, inflation rates and output differentials for 11 countries (relative to US) yielded the same result. There is thus little evidence that central bank bond-buying in the US had an independent, distinct impact on US interest rates.