Central Bank Reserves and the Yield Curve at the ZLB

With short term interest rates bounded at zero, monetary policy has aimed at affecting the yield curve at the longer end during the recent years. As the recent literature has shown, the quantitative easing programs conducted by the Federal reserve have significantly lowered long-term yields. This paper adds central bank reserves as a fourth factor to an affine term structure model to estimate the effect of quantitative easing on the yield curve. The cumulative effect on 10-year Treasury securities during the zero lower bound period is estimated to amount to 85 basis points. Of the total effect, one quarter is shown to be due to the liquidity effect and three quarters to the supply effect. To disentangle the two effects, the estimates for the US are compared to estimates for Swiss data because the Swiss national bank did not engage in any government bond purchases.