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How Persistent Are Unconventional Monetary Policy Effects?

Event studies show that the Federal Reserve’s announcements of forward guidance and large Scale asset purchases had large and desired effects on asset prices but they do not tell us how long such effects last. Wright (2012) used a structural vector autoregression (SVAR) to argue that unconventional policies have very transient effects on bond yields, with half-lives of 3 to 6 months. The present paper shows, however, that the SVAR is very possibly misspecified, structurally unstable, forecasts very poorly and therefore delivers spurious inference. In addition, the implied in-sample return predictability from the SVAR greatly exceeds a level consistent with rational asset pricing and reasonable risk aversion. Restricted models that respect more plausible asset return predictability are more stable and imply that the unconventional monetary policy shocks were fairly persistent. Estimates of the dynamic effects of shocks should respect the limited predictability in asset prices.

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