Authors: David O. Lucca and Jonathan H. Wright
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Staff Reports
The Narrow Channel of Quantitative Easing: Evidence from YCC Down Under
Number 1013
April 2022
April 2022
JEL classification: E4, E5, G1
We study the recent Australian experience with yield curve control (YCC) of government bonds as perhaps the best evidence of how this policy might work in other developed economies. We interpret the evidence with a simple model in which YCC affects prices of both government and other bonds via “broad” transmission channels, but only government bond prices through “narrow” liquidity channels. YCC seemingly worked well in 2020 while the market expected short rates to stay at zero for long. But as the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, the Reserve Bank of Australia purchased most of the outstanding amount of the targeted government bond, and its yield dislocated from other financial market instruments. The model and empirical evidence point to narrow transmission channels playing more prominent roles than broad channels considered in prior studies of quantitative easing (QE), such as portfolio balance effects and signaling about short term rates. We argue that asset-specific narrow channels may be primary transmission mechanisms of quantity-based QE policies as well.
Author Disclosure Statement(s)
David O. Lucca
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper.
Jonathan H. Wright
I declare that I have no relevant or material financial interests that relate to the research described in this paper.
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper.
Jonathan H. Wright
I declare that I have no relevant or material financial interests that relate to the research described in this paper.
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