Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound
by Christiane Baumeistera and Luca Benatib
We explore the macroeconomic effects of a compression
in the long-term bond yield spread within the context of
the Great Recession of 2007–09 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.
JEL Codes: C11, C32, E52, E58.
Full article (PDF, 48 pages 3672 kb)
Discussion by Márcio G. P. Garcia
a Bank of Canada
b University of Bern