Bond Pricing and Business Cycles with Central Bank Asset Purchases

Abstract

I study central bank asset purchase effects in an estimated general equilibrium macroeconomic model with required borrowing for particular expenditures and a constrained credit market. Counterfactual simulations show Federal Reserve asset purchase programs from 2009 through 2014 reduce the yield curve's slope by 2.9\% at peak with a limited output effect. The yield curve does not invert in late 2019 absent these asset purchases, highlighting the policy dependence of any recession indicator properties of the yield curve. The estimation exercise provides new term premium estimates. Furthermore, I address modeling debt in macroeconomic models, comparing loan-in-advance and relatively impatient borrower specifications.