Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

Abstract: I analyze the recent experience of unconventional monetary policy in Sweden to study the interest rate transmission mechanisms of government bond purchases when interest rates are not constrained by a lower bound. Using dynamic term structure models and event study regressions I find that government bond purchases have important portfolio balance and signaling effects. The signaling channel operates mainly by lowering short-rate expectations in the intermediate segment of the yield curve, while the portfolio balance channel is effective in lowering longer maturity term premia. In addition, I find that target interest rate policy and government bond purchases operate in different segments of the yield curve. This suggests that a combination of the two policies can be used to lower interest rates across the whole maturity spectrum, making monetary policy more expansionary.

Keywords: quantitative easing; signaling channel; portfolio balance channel; yield curve; dynamic affine term structure models; short rate expectations; term premium

JEL-codes: E43; E44; E52

50 pages, May 1, 2016

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