Does Quantitative Easing Increase the Risk of Long-Term Inflation Expectations Unanchoring?

This paper investigates the cost of Quantitative Easing in the U.S. by focusing on its lasting effects on long-term inflation expectations. I use a high-frequency approach to identify the QE components of each FOMC announcement that have the greatest explanatory power in price change of federal funds futures and eurodollar futures. Then I use them as external instruments for monetary policy shocks in VAR model and estimate the impulse response of inflation expectations. The evidence shows that unexpected QE shocks can have large instant effects on both short-term and long-term inflation expectations. One standard deviation of QE shock can lead to a 0.01 percent change in long-term inflation expectations and around 21 percent variation in long-term inflation expectations is attributed to the QE shock. In contrast, long-term inflation expectations sustain a lasting influence for an extended period while effects die out soon for short-term expectations, which can lead to the unanchoring of inflation expectations.