The Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial Institutions

Abstract

On 21st September, 2016, the Bank of Japan (BOJ) embarked on a new unconventional monetary policy called yield curve control (YCC). We show that YCC creates an arbitrage opportunity in an otherwise frictionless and arbitrage-free government bond market which financial institutions can exploit. This arbitrage creates a wealth transfer from the BOJ to these financial institutions. We estimate the lower bound on this wealth transfer for the first 28 months to be $5.25 billion or ¥582.32 billion, which constitutes an unexplored policy externality. This corresponds to 7.49% per annum on the notional employed in this arbitrage strategy.