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Evidence on The Portfolio Balance Channel of Quantitative Easing

The Federal Open Market Committee has recently attempted to stimulate economic growth using unconventional methods. Prominent among these is quantitative easing (QE)—the purchase of a large quantity of longer-term debt on the assumption that QE reduces long-term yields through the portfolio balance channel. I present several reasons to be skeptical of the theoretical foundations of this channel and offer several arguments for why the effect of QE might be relatively small even if this channel is theoretically valid. Consistent with these arguments, an empirical analysis of the portfolio balance channel provides essentially no support for it.

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