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posted on 22 August 2015

The Impact Of Unconventional Monetary Policy On Firm Financing

by Philadelphia Fed

-- this post authored by Nathan Foley-Fisher, Rodney Ramcharan, and Edison Yu

In response to the financial crisis and the weak economy, the federal funds rate has been at the zero lower bound since December 2008. To help overcome the zero lower bound constraint and to stimulate economic activity, the Federal Reserve and other central banks have implemented a number of unconventional policies, including a series of large-scale asset purchases or quantitative easings (QEs). These policies are in part intended to work around the zero lower bound constraint by directly buying assets, such as U.S. Treasury bonds and mortgage-backed securities, to offset disruptions in private sector intermediation in the aftermath of the financial crisis and stimulate the economy (Cahill et al. (2013), Gertler and Karadi (2011), Krishnamurthy and Vissing-Jorgensen (2011), and Shleifer and Vishny (2011)).

This paper develops a number of empirical tests to understand better the impact of unconventional monetary policy. We focus mainly on the Federal Reserve's attempt to flatten the yield curve through the maturity extension program (MEP), which was announced on Sept. 21, 2011. The MEP was explicitly intended to reduce the supply of long-term Treasury securities and put downward pressure on longer-term interest rates, especially on those assets considered to be close substitutes for long-term Treasury securities. Lower borrowing costs and increased credit availability were then expected to relieve possibly binding financing constraints on firms and households. To that end, the MEP committed the Federal Reserve to sell about $400 billion in shorter-term Treasury securities and use the proceeds to buy longer-term Treasury securities. The program was extended in June 2012 through December 2012 for an additional $267 billion. In this paper, we examine how stock prices, debt issuance, and firms' investment and hiring activities reacted to the MEP.

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