QE: is there a portfolio balance effect?

The Federal Open Market Committee has recently attempted to stimulate economic growth using unconventional methods. Prominent among these is quantitative easing (QE)—the purchase of a large quantity of longer-term debt on the assumption that it will reduce long-term yields through the portfolio balance channel. Former Federal Reserve Chairman Ben Bernanke and others suggest that QE works through the portfolio balance channel, which implies a strong, statistically significant positive relationship between the public’s holding of long-term Treasury debt and long-term Treasury yields. The author uses the econometric approach of Gagnon et al. (2011) and others to investigate the relationship between a variety of measures of the public’s debt holding and various yield measures in the literature. The empirical results provide virtually no support for the portfolio balance channel.