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The Large-Scale Asset Purchases Had Large International Effects
This paper evaluates the effect of the Federal Reserve’s large scale asset purchases (LSAP) on international long bond yields and exchange rates and then considers whether the observed behavior is consistent with a simple portfolio balance model and previous estimates of the impact of equivalent federal funds stimulus on exchange rates. The LSAP announcements substantially reduced international long-term bond yields and the spot value of the dollar. These changes closely followed announcement times and were very unlikely to have occurred by chance. The jump depreciations of the USD are consistent with estimates of the impacts of previous equivalent monetary policy shocks. The portfolio choice model explains the changes in expected U.S. and foreign real bond yields very well, conditional on the observed exchange rate jumps. The LSAP announcements do not appear to have reduced yields by reducing expectations of real growth. The LSAP’s ability to reduce international long-term interest rates and the value of the dollar shows that central banks are not toothless when short rates hit the zero bound.
