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The next recession is coming up soon and I've been wondering how effective our expansionary monetary policy will be. The interest rate doesn't have a ton of room to be lowered and bond yields are half of what they were before the great recession, which leads me to my question.

Since QE suppresses bond yields, if bond yields start out low already and can't be lowered much more, does that mean QE would fail to stimulate investment? And if so, might the government start purchasing other assets like corporate bonds or stocks?

Or am i wrong and bond yields do not effect QE? Maybe QE does not seek to lower bond yields but to only increase market liquidity? (though low-yield treasuries are pretty liquid already)

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  • $\begingroup$ Why do you suppose Treasury/GSE bond yields can’t go below zero? If the Fed’s purchases push the price above par, yields will just go negative. If they don’t do so because other participants start buying risky assets instead, then that’s exactly the intended effect, right? $\endgroup$ – dismalscience Jul 2 '19 at 0:42
  • $\begingroup$ Could they go below zero? It seems impossible to me because I can't imagine why anyone wouldn't just hold onto their USD at that point (since the bond is denominated in USD). Because of this I would imagine yields to be asymptotic at y = 0, so the closer to zero yields are the more government buying it takes to lower them by a given percentage amount. At least that's what I was thinking. $\endgroup$ – Jonah Jul 2 '19 at 2:43
  • $\begingroup$ They can, and do, because for institutions with large “cash” holdings, bank balances aren’t safe (insurance is capped quite low), physical cash is impractical to secure, etc. If you really want a safe place to store money, accepting small negative yields on safe bonds is sometimes your best bet. And again, keep in mind that for it to be asymptotic, you’d have to assume that other securities holders were selling safe assets and buying risky assets instead (if they didn’t react, yields would cross zero), which again would mean QE was working. $\endgroup$ – dismalscience Jul 2 '19 at 2:49
  • $\begingroup$ That makes sense, if you have over the FDIC insurance limit your deposits are basically just an IOU from a private bank ...a bond! And I see what you're saying about QE still working, which partially answers my question, but I'd also like to know how effective (i.e. how cost efficient) it is in a low yield environment vs a higher yield one. Does the Fed get more bang for their buck in terms of getting securities holders to buy risky assets when treasury bond yields are high? $\endgroup$ – Jonah Jul 2 '19 at 3:15
  • $\begingroup$ And if so, as yields fall, at what point is it a better idea for the fed to just buy the risky assets itself? $\endgroup$ – Jonah Jul 2 '19 at 3:17

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