The Impact of Unconventional Monetary Policy on Financial Markets, Credit Markets and Financial Stability

In response to the 2008 financial crisis, the Federal Reserve initially responded using the federal funds rate. However, by December 2008 it had reached the zero lower bound (ZLB). With economic conditions still deteriorating the Federal Reserve used unconventional monetary policy actions in the form of Large-Scale Asset Purchases (LSAPs) to lower a range of long-term interest rates. The intention was to stimulate economic activity and promote recovery. The purpose of this dissertation is to analyze the effects of LSAPs from three perspectives. In the first chapter we find that LSAPs had a positive effect on the stock prices of some financial sectors. However, the effects were not as statistically significant for nonfinancial sectors. In the second chapter, we find that LSAPs helped the consumer and mortgage credit markets but not business credit. Overall the effects were weak. In the third chapter, we document the change in the Federal Reserve and banks' balance sheets as a result of LSAPs. It is clear that most of the liquidity injections remained as excess reserves, though we show an upper bound on how much of these injections went into new loans and deposits relative to cash or excess reserves. We discuss alternative ways that LSAPs could have mattered, such as through rebuilding bank balance sheets. Even though the liquidity injections may not be able to stimulate economic recovery they may help rebuilt and strengthen financial institutions. Restoring financial stability is beneficial to avoid a complete collapse of systemically important financial institutions.