The 1932 Federal Reserve Open‐Market Purchases as a Precedent for Quantitative Easing

Abstract The $1 billion open‐market operation conducted by the Federal Reserve, at the height of the Great Depression, was a successful precedent to the recent Quantitative Easing (QE) programs. The 1932 program entailed large purchases of medium‐ and long‐term securities over a 4‐month period. An event study analysis indicates that the program dramatically lowered medium‐ and long‐term Treasury yields. A segmented markets model is used to analyze the effects of the open‐market purchases on the economy. A significant degree of financial market segmentation is estimated, and partly explains the observed upturn in output growth. Had the Federal Reserve continued its operations and used the announcement strategy used in QE1, the Great Contraction could have been attenuated earlier. Our historical analysis suggests that the Federal Reserve in 2008 had a good predecessor to its actions.