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Juan Antonio Montecino and Gerald Epstein

This paper empirically examines the effects of the Federal Reserve’s Large Scale Asset Purchases (LSAP) on bank profits. We use a new dataset on individual LSAP transactions and bank holding company data from the Fed’s FRY-9C regulatory reports to construct a large panel of banks for 2008Q1 to 2009Q4. Our results suggest that banks that sold Mortgage-backed Securities to the Fed (“treatment banks”) experienced economically and statistically significant increases in profitability after controlling for common determinants of bank performance. Banks heavily “exposed” to MBS purchases should also experience increases in profitability through asset appreciation. Our results also provide evidence for this type of spillover effect and suggest that large banks may have been more affected. Although our results suggest that MBS purchases increased bank profits, we find only mixed evidence that these were associated with increased lending. Our findings are thus consistent with the hypothesis that the Federal Reserve undertook these policies, at least in part, to increase the profitability of their main constituency: the large banks.

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Juan Antonio Montecino and Gerald Epstein

The Federal Reserve’s “quantitative easing” (QE) policy ended in the fall of 2014, even though economic growth in the US was still sluggish, wage growth was stagnant and inflation was still far below the Federal Reserve’s target of 2%. In this paper we seek some clues to help explain the Fed’s decision by studying the political economy of the QE policy. In particular, we study which business sectors were expected to gain and which ones were expected to lose from the three rounds of QE, indicating, perhaps, the political pressures the business community might have brought to bear on Federal Reserve decisions at that time. This paper is a follow up to Montecino and Epstein (2014) in which we studied the impact of QE I on the large banks that had been counter parties to the Federal Reserve’s Large Scale Asset Purchase Program and on other banks that had significant amounts of mortgage backed securities (MBS) on their balance sheets. We showed that these banks’ profits were increased by QE1 compared to other banks that did not have a large amount of MBS.

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Gerald Epstein and Juan Antonio Montecino

This chapter studies the political economy of the Federal Reserve’s ‘quantitative easing’ (QE) policy by examining which business sectors of the US economy were expected to gain and which ones were expected to lose as a result of QE. The authors carry out an event study to estimate stock-level cumulative abnormal stock returns around the announcement windows for all three rounds of QE. Their results indicate that a broad subset of the US economy was expected to benefit from the first two rounds of QE, with large firms experiencing greater returns. However, the expected gains appear to have decreased over each round of QE. By QE3, only a few sectors, including some subsectors of finance, were expected to benefit, while a non-trivial set of sectors were expected to be harmed. The authors conjecture that this ‘QE fatigue’ among investors may help explain the Fed’s decision to end QE in 2014.