Discussion of “The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases"

It is now one of the most important tasks in the area of monetary policy research to empirically evaluate the effectiveness of the monetary policy operations adopted by the central banks facing the zero lower bound. In this paper, Gagnon et al. (2011) empirically investigate the impacts of the Federal Reserve’s program called large-scale asset purchases (LSAPs). They conduct two types of empirical exercises for this purpose: the event-study analysis and the time-series analysis. They find through the event-study analysis that the LSAPs of $1.7 trillion lowered the ten-year Treasury yield by 62 basis points, and that the ten-year agency debt yield and the mortgage-backed securities (MBS) yield declined more. They also find through the time-series analysis using the data over 1985 to 2008 that the LSAPs lowered the ten-year Treasury yield by 52 basis points. They also provide some evidence that the decline in the long-term interest rate reflects lower risk premiums, rather than lower expectations about future short-term interest rates. The ultimate purpose of the paper is to know whether the LSAPs program worked or not. In the simplest way, their answer is, “Yes, it worked.” But my first reaction was how large the number like “62 basis points” is, and whether this decline was sufficiently large to improve conditions in the U.S. credit markets. In my discussion, I will try to think about the economic meaning of their estimates. But before going to detailed comments, let me briefly mention the unique