Estimated Impact of the Federal Reserve’s Mortgage-Backed Securities Purchase Program
by Johannes Stroebel and John B. Taylor
The largest credit or liquidity program created by the
Federal Reserve during the financial crisis was the mortgage-backed
securities (MBS) purchase program. In this paper, we
examine the quantitative impact of this program on mortgage
interest rate spreads. This is more difficult than frequently perceived
because of simultaneous changes in prepayment risk and
default risk. Our empirical results attribute a sizable portion
of the decline in mortgage rates to such risks and a relatively
small and uncertain portion to the program. For specifications
where the existence or announcement of the program appears
to have lowered spreads, we find no separate effect of the stock
of MBS purchased by the Federal Reserve.
JEL Codes: E52, E58, G01.
(PDF, 42 pages 629 kb)