Unconventional Monetary Policy and the Allocation of Credit

Marco Di Maggio, Amir Kermani ,Christopher Palmer

May 2016

Abstract

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 real effects of unconventional monetary policy. Using uniquely 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 assets purchased and degree of segmentation in the market. 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. This de facto allocation of credit across mortgage market segments,combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity
between mortgage-market policy and the effectiveness of Fed MBS purchases. In
particular, more relaxed GSE eligibility requirements would have resulted in more refinancing from economically distressed regions and fewer households deleveraging overall. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.