Liquidity Effects of Quantitative Easing on Long-Term Interest Rates

Signe Krogstrup, Samuel Reynard and Barbara Sutter



JEL classification
E43, E52, E58

Quantitative Easing, Reserves, Liquidity Effect, Long-Term Interest Rates, Zero Lower Bound, Monetary Policy, Portfolio Balance


This paper argues that the expansion in reserves following recent quantitative easing programs of the Federal Reserve may have affected long-term interest rates through liquidity effects. The data lends some support for liquidity effects, in that reserves were negatively correlated with long-term yields at the zero lower bound. Estimates suggest that between January 2009 and 2011, 10-year US Treasury yields fell 46-85 basis points as a result of liquidity effects. The liquidity effect is separate from the portfolio balance effect of the change in the public supply of Treasury bonds, which is estimated to have reduced yields by another 20 basis points during that period.