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Quantitative Easing and the Term Premium: Evaluating the Portfolio Balancing Channel in Sweden and the United States

Johnsson, Anton LU (2025) NEKP01 20251
Department of Economics
Abstract
This study investigates the effectiveness of the portfolio balancing channel in the transmission of quantitative easing (QE) to term premiums in government bond yields in Sweden and the United States. Using an arbitrage-free Nelson-Siegel dynamic term structure model and a structural vector autoregressive (SVAR) framework, we estimate term premiums and assess the impact of central bank large-scale asset purchases through impulse response analysis. Our findings reveal no statistically significant effect of QE on term premiums in Sweden, whilst the United States shows significant but theoretically unexpected results. Only the increasing impact over maturities aligns with theoretical predictions. These mixed outcomes underscore the complexity... (More)
This study investigates the effectiveness of the portfolio balancing channel in the transmission of quantitative easing (QE) to term premiums in government bond yields in Sweden and the United States. Using an arbitrage-free Nelson-Siegel dynamic term structure model and a structural vector autoregressive (SVAR) framework, we estimate term premiums and assess the impact of central bank large-scale asset purchases through impulse response analysis. Our findings reveal no statistically significant effect of QE on term premiums in Sweden, whilst the United States shows significant but theoretically unexpected results. Only the increasing impact over maturities aligns with theoretical predictions. These mixed outcomes underscore the complexity of QE and the sensitivity of results to model specification. We highlight the limited empirical support for the portfolio balancing channel, calling for cautious application of QE as a monetary policy tool and further research to better understand its transmission mechanisms. (Less)
Please use this url to cite or link to this publication:
author
Johnsson, Anton LU
supervisor
organization
course
NEKP01 20251
year
type
H2 - Master's Degree (Two Years)
subject
keywords
quantitative easing, portfolio balancing channel, monetary policy, term structure modelling, term premium
language
English
id
9198245
date added to LUP
2025-09-12 11:11:36
date last changed
2025-09-12 11:11:36
@misc{9198245,
  abstract     = {{This study investigates the effectiveness of the portfolio balancing channel in the transmission of quantitative easing (QE) to term premiums in government bond yields in Sweden and the United States. Using an arbitrage-free Nelson-Siegel dynamic term structure model and a structural vector autoregressive (SVAR) framework, we estimate term premiums and assess the impact of central bank large-scale asset purchases through impulse response analysis. Our findings reveal no statistically significant effect of QE on term premiums in Sweden, whilst the United States shows significant but theoretically unexpected results. Only the increasing impact over maturities aligns with theoretical predictions. These mixed outcomes underscore the complexity of QE and the sensitivity of results to model specification. We highlight the limited empirical support for the portfolio balancing channel, calling for cautious application of QE as a monetary policy tool and further research to better understand its transmission mechanisms.}},
  author       = {{Johnsson, Anton}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Quantitative Easing and the Term Premium: Evaluating the Portfolio Balancing Channel in Sweden and the United States}},
  year         = {{2025}},
}