The ‘Visible Hand’ of the ECB’s first quantitative easing

Abstract

Quantitative easing a la ECB has produced significant impact on long-term nominal rates through ex ante channels, such as signalling channels, term duration channels, and risk premia channels, well before it materially started. Ex post difference-in-differences estimation suggests a significant impact on long-term government bond yields, while the impact of the ECB’s first QE on the key inflation rate is very weak. The term duration channel may also lead to a lengthening of the average maturity of government debts, with possible implications for fiscal policy. The ECB’s determination to buy government bonds in a fragmented market with a low net supply is also producing an ex post impact, i.e. during the actual asset purchases. High rates volatility suggests that this impact is less on nominal rates and more on financial plumbing. As the effects of scarce supply in collateral markets are felt, repo rates remain well below zero. Low supply and limited re-usability of high quality collateral, capped by regulatory requirements, is an additional constraint on market liquidity and compresses dealers’ balance sheets. By keeping a depressed yield curve and asset prices high, QE is also accelerating the consolidation of both traditional and capital-market based (dealer) bank business models, raising questions about implications for global collateral flows and deposit-like funding channels.