Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80753
Authors: 
Baumeister, Christiane
Benati, Luca
Year of Publication: 
2012
Series/Report no.: 
Bank of Canada Working Paper 2012-21
Abstract: 
We explore the macroeconomic effects of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a time-varying parameter structural VAR model. We identify a 'pure' spread shock defined as a shock that leaves the policy rate unchanged, which allows us to characterize the macroeconomic consequences of a decline in the yield spread induced by central banks' asset purchases within an environment in which the policy rate is constrained by the effective zero lower bound. Two key findings stand out. First, compressions in the long-term yield spread exert a powerful effect on both output growth and inflation. Second, conditional on available estimates of the impact of the Federal Reserve's and the Bank of England's asset purchase programs on long-term yield spreads, our counterfactual simulations suggest that U.S. and U.K. unconventional monetary policy actions have averted significant risks both of deflation and of output collapses comparable to those that took place during the Great Depression.
Subjects: 
Monetary policy framework
Interest rates
Econometric and statistical methods
Transmission of monetary policy
JEL: 
C11
C32
E52
E58
Document Type: 
Working Paper

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