future path of short - term rates – as would be the case with a conventional monetary easing – but rather because of a change in the term premium? by way of a benchmark, it should be emphasized that many macro models – including the fed staff ’ s frb / us model – implicitly treat the two sorts of shocks as having similar effects on corporate investment. but is there any reason to believe that, in reality, the response to the two might differ? a basic corporate finance analysis suggests the answer may be yes – and, in particular, that a shock to the term premium is more likely to elicit a financing response on the part of firms, as opposed to a change in their capital spending plans. to see why, consider the following example. a firm faces a rate on its 10 - year bonds of 2 percent. at the same time, it expects that the sequence of rolled - over short - term rates over the next 10 years will average 3 percent. hence, there is a term premium of minus 1 percent. what should the firm do? clearly, it should take advantage of the cheap long - term debt by issuing bonds. but if the firm is not facing a binding financing constraint, it is less obvious that the bargain 2 percent rate see jeremy c. stein ( 2012 ), “ evaluating large - scale asset purchases, ” speech delivered at the brookings institution, washington, october 11. see don h. kim and jonathan h. wright ( 2005 ), “ an arbitrage - free three - factor term structure model and the recent behavior of long - term yields and distant - horizon forward rates ( pdf ), ” finance and economics discussion series 2005 - 33 ( washington : board of governors of the federal reserve system, august ). bis central bankers ’ speeches on these bonds should exert any influence on its capital spending plans. after all, it can use the proceeds of the bond issue to pay down short - term debt, repurchase stock, or buy short - term securities. these capital - structure adjustments all yield an effective return of 3 percent. as a result, the hurdle rate for new investment should remain pinned at 3 percent. in other words, the negative term premium matters a lot for financing behavior, but in this stylized world, investment spending is decoupled from the term premium and is determined instead by the expected future path of short rates. this reasoning suggests why one might expect future rounds of treasury - based lsaps to have dimini

jeremy c stein : large - scale asset purchases speech by mr jeremy c stein, member of the board of governors of the federal reserve system, at the third boston university / boston fed conference on macro - finance linkages, boston, massachusetts, 30 november 2012. * * * given that the conference theme is macro - finance linkages, i thought i would try to lay out a corporate finance perspective on large - scale asset purchases ( lsaps ). i have found this perspective helpful in thinking both about the general efficacy of lsaps going forward, and about the differential effects of buying treasury securities as opposed to mortgage - backed securities ( mbs ). but before i get started, please note the usual disclaimer : the thoughts that follow are my own and do not necessarily reflect the views of other members of the federal open market committee ( fomc ). i should also mention that these comments echo some that i made in a speech at brookings last month. 1 as i noted in that speech, i support the committee ’ s decision to purchase mortgage - backed securities ( mbs ) at a rate of $ 40 billion per month, in tandem with the ongoing maturity extension program in treasury securities, and its plan to continue with asset purchases if the committee does not observe a substantial improvement in the outlook for the labor market. i will start with the case of treasury lsaps, and then go on to discuss the differences that arise when the fed purchases mbs instead. one thing that seems clear in the data is that if you buy a lot of long - term treasury securities, this exerts significant downward pressure on their yields and term premiums. indeed, the fed ’ s past actions are likely one important reason why treasury term premiums are now near historic lows, on the order of minus 80 basis points, according to a model used by the board staff. 2 moreover, while this is not entirely uncontroversial, my own reading of the evidence is that there has also been substantial pass - through to corporate bond rates. based on this evidence, a reasonable estimate is that, if the fed were to undertake an additional $ 500 billion treasury lsap, both long - term treasury and corporate bond rates might be expected to decline by something on the order of 15 to 20 basis points. this observation leads to an important conceptual question : how should one expect a firm to respond when its long - term borrowing costs fall not because of a change in the expected