Unconventional Monetary Policy and the Allocation of Credit∗

Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how the composition of purchased assets matters for the pass through of unconventional monetary policy. Using rich mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the nature of the assets purchased. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-guaranteed mortgage originations significantly more than the origination of non-GSE mortgages. In contrast, QE2’s focus on purchasing Treasuries did not have such differential effects. Moreover, we find that most bank proceeds from LSAPs remained in Excess Reserves with the Fed, with little evidence supporting the bank-lending channel or bank-portfolio rebalancing transmission mechanism of LSAPs. The targeted nature of the Fed’s RMBS purchasing program thus de facto allocated credit across mortgage market segments and more broadly across fixed-income markets. This led to an unintended consequence of the program: many borrowers delevered to take advantage of QE-induced low interest rates by refinancing existing mortgages into GSE-eligible loans that were below local Conforming Loan Limits and below 80% LTV. Finally, we show that HARP significantly alleviated this behavior, suggesting that complementary interventions enhanced the strength of Quantitative Easing on the real economy. ∗We thank Adam Ashcraft, Geert Bekaert, Charles Calomiris, John Campbell, Gabriel Chodorow-Reich, Sam Hanson, Arvind Krishnamurthy, Michael Johannes, David Scharfstein, Philipp Schnabl, Jeremy Stein, Johannes Stroebel, Stijn Van Nieuwerburgh, workshop participants at Berkeley and Columbia, and seminar participants at the Econometric Society 2016 Meetings, San Francisco Federal Reserve, USC (Price), University of Minnesota (Carlson), NYU (Stern), University of Illinois at Urbana Champaign, and the Catholic University of Milan for helpful comments and discussions. We thank Sam Hughes for excellent research assistance. †Columbia Business School ([email protected]) ‡University of California, Berkeley ([email protected]) §University of California, Berkeley ([email protected])