Quantitative easing and systemic risk in the post-Lehman era

ABSTRACT

This paper tests the likely efficacy of the Fed’s unconventional monetary policies adopted in the post-Lehman era to affect market optimism by examining the response of systemic risk in the U.S. financial system, measured by the St. Louis Fed’s Financial Stress index, to changes in the Fed’s total assets and the monetary base. In the context of a state-space VAR model, this research reveals that the growth rates of total assets and monetary base have predictive content for the financial stress index with a negative sign, implying that quantitative easing policies have contributed significantly to lower systemic risk, by affecting market optimism.

KEYWORDS:

• Quantitative easing
• systemic risk
• balance sheet
• VAR
• state-space model

JEL CLASSIFICATION:

• E52
• E58
• G15

Acknowlgement

We would like to thank, without implicating, an anonymous referee for their comments and suggestions which have improved the final outcome.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.