What does Monetary Policy do to Long-Term Interest Rates at the Zero Lower Bound?

The federal funds rate has been stuck at the zero bound for over two years and the Fed has turned to unconventional monetary policies, such as large scale asset purchases to provide stimulus to the economy. This paper uses a structural VAR with daily data to identify the e¤ects of monetary policy shocks on various longer-term interest rates during this period. The VAR is identi…ed using the assumption that monetary policy shocks are heteroskedastic: monetary policy shocks have especially high variance on days of FOMC meetings and certain speeches, while there is nothing unusual about these days from the perspective of any other shocks to the economy. A complementary high-frequency eventstudy approach is also used. I …nd that stimulative monetary policy shocks lower Treasury and corporate bond yields, but the e¤ects die o¤ fairly fast, with an estimated half-life of about two months. JEL Classi…cation: C22, E43, E58. Keywords: Monetary policy, Identi…cation, Quantitative easing, Zero lower bound, Vector Autoregression, Event study. Department of Economics, Johns Hopkins University, Baltimore MD 21218; [email protected]. I am grateful to Tobias Adrian, Joseph Gagnon, Refet Gürkaynak and Eric Swanson for helpful discussions. All errors are my sole responsibility.