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Economic Brief

January 2011, No. 11-01

How Might the Fed's Large-Scale Asset Purchases Lower Long-Term Interest Rates?

Renee Haltom and Juan Carlos Hatchondo

Over the past two years the Federal Reserve has engaged in large-scale asset purchases (LSAPs), often grouped under the heading of "quantitative easing," as an alternative means of stimulating the economy when policy rates are at their zero lower bound. Theoretical and empirical research shows how this policy may lower long-term interest rates, and financial market data suggest that the initial launch of LSAPs had an effect on expectations about future Fed policy.

Additional Resources

Bernanke, Ben, Vincent Reinhart, and Brian Sack, "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Federal Reserve Board of Governors Finance and Economics Discussion Series 2004-08, September 2004.

Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack, "Large Scale Asset Purchases by the Federal Reserve: Did They Work?" Federal Reserve Bank of New York Staff Reports, March 2010.

Kocherlakota, Narayana, "The Tools of the FOMC," Speech to Fargo Area Business Leaders, October 2010.

Vayanos, Dimitri, and Jean-Luc Vila, "A Preferred-Habitat Model of the Term Structure of Interest Rates," National Bureau of Economic Research Working Paper No. 15487, November 2009.

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