Large-scale Asset Purchases Research Articles

Stock market responses to unconventional monetary policy shocks

We assess the impact of forward guidance and large-scale asset purchases (LSAPs) on stock market returns, finding that LSAP shocks during unconventional periods affect stock returns in a manner similar to federal funds rate (FFR) shocks during conventional periods.

Liquidity in the German corporate bond market: Has the CSPP made a difference?

The Eurosystem purchased €178 billion of corporate bonds between June 2016 and December 2018 under the Corporate Sector Purchase Programme (CSPP). Did these purchases lead to a deterioration of liquidity conditions in the corporate bond market, thus raising concerns about unintended consequences of large-scale asset purchases? To answer this question, we combine the Bundesbank's detailed CSPP purchase records with a range of liquidity indicators. We find that while the flow of purchases initially supported secondary market liquidity by providing a predictable source of demand, liquidity conditions deteriorated in the long-run as the Bundesbank reduced the stock of corporate bonds available for trading in the secondary market.

Dynamic Stochastic General Equilibrium Model for the Analysis of Large-Scale Asset Purchases: Lessons Learned for Cambodia

Dynamic Stochastic General Equilibrium Model for the Analysis of Large-Scale Asset Purchases: Lessons Learned for Cambodia

Quantitative easing and bank risk-taking: Evidence from the federal reserve's large-scale asset purchases

This study uses individual bank balance sheet data from the United States to investigate the effects of the Federal Reserve's large-scale asset purchases, which are commonly known as quantitative easing (QE), on bank lending standards and risk-taking behaviour. Covering all three phases of QE (QE1, QE2 and QE3), we find a consistent and significant reduction in bank lending standards during each phase, indicating that QE incentivised banks to extend relatively riskier loans while relaxing lending standards. We also compare the effects of QE with those of conventional monetary policy instruments, such as short-term interest rates. Despite short-term interest rates reaching the zero lower bound and continuing to influence bank risk-taking behaviour, our analysis suggests that the impact remains relatively stable over time. Consequently, we cautiously assert that QE is a more potent tool for stimulating economic activity, effectively substituting for the role of the monetary policy rate during periods when traditional monetary policy options are constrained.

The Unforeseen Results of Unconventional Monetary Dominance

This empirical study investigates the implications of the substantial size of central banks’ balance sheets and the potential risks of their gradual normalization. Following the global financial crisis of 2008, central banks worldwide implemented unprecedented monetary stimulus measures, including large-scale asset purchases and unconventional policy tools like quantitative easing (QE). As a result, central bank balance sheets expanded significantly, reaching historically unprecedented levels in size and composition. While these measures played a crucial role in stabilizing financial markets and supporting economic recovery, concerns have arisen regarding the eventual reduction of these balance sheets and the possibility of disruptive market dynamics. This research examines the challenges and risks of normalizing central bank balance sheets. Furthermore, it explores the potential occurrence of “hard landing” scenarios, where sudden reductions in balance sheets could trigger financial market turmoil and economic downturns. By analyzing historical precedents and theoretical frameworks, this paper offers valuable insights into the intricate relationship between central bank balance sheets and the dynamics of financial markets. It provides policymakers and market participants with valuable perspectives on navigating the path toward monetary policy normalization.

The effect of monetary policies on inflation: A fiscal perspective

We estimate how US monetary policies, namely the current fed funds rate, forward guidance, and large-scale asset purchases, affect inflation. The effect of large-scale asset purchases on inflation is found to be much smaller in the intended direction than the other policies. This difference is accounted for by the responses of fiscal policy. While fiscal policy is eased in response to monetary tightening in the short run, the long-run fiscal consolidation is less intense under unconventional monetary policies.

Monetary policy spillovers between the US and African Central Banks: A time- and frequency-varying connectedness study

This study investigates time and frequency connectedness between monetary policy in the US and 7 African countries to determine the extent to which US monetary policy influences policy conduct amongst African Central Banks. We use a time-varying parameter vector autoregressive (TVP-VAR) framework with frequencies to extract the spectral representation of the forecast error variance decompositions of the TVP-VAR and form 3 bands of frequency strata corresponding to long-run, medium-run and short-run. The results of the study are as follows: firstly, the static analysis shows that the US is the dominant transmitter of systemic shocks across all frequencies and the vulnerability of African countries as recipients of these shocks varies across frequency bands. Secondly, the dynamic analysis further reveals stronger short- and medium-run systemic connectedness during the periods of the Large Scale Asset Purchase programme and forward guidance policies whereas long-run connectedness is prominent during periods of US conventional monetary policy particularly in the COVID-19 era. The findings from the country-by-country dynamic spillover specifically show that countries which are more (less) responsive to US monetary policy shocks have lower (higher) inflation rates averages since the start of the pandemic. The findings suggest that African Central Banks can be benefit from higher coordination with the US Federal Reserve and we further propose that Central Banks worldwide in setting similar inflation targets.

Balance sheet expansionary policies in the euro area: Macroeconomic impacts and a vulnerable versus non-vulnerable comparison

This paper investigates the impacts and heterogeneity of the ECB's large-scale asset purchasing programs of sovereign securities on real GDP, inflation, long-term sovereign bond yields, systemic stress, and the unemployment rate. A structural Bayesian VAR model with six endogenous variables was estimated for 11 euro area countries over the period 2012:M1 to 2023:M12. To provide robustness to the results, a structural panel BVAR model is estimated, enabling a straightforward comparison of impulse responses of vulnerable and non-vulnerable countries. The results suggest that the magnitudes of impulse responses were more favorable in countries that were more economically and financially vulnerable. These findings underscore that financial and economic distress was a source of heterogeneity in the responses to large scale asset purchases within the euro area.

The contradictions of unconventional monetary policy as a post-2008 thwarting mechanism: financial dominance, shadow banking, and inequality

The global financial crisis (GFC) of 2008 has triggered profound changes in the macro-financial regulatory architecture. Ever since, the interplay between political, institutional, and macroeconomic developments has received increasing attention in political economy, as in the evolutionary macro-financial approach of institutional super-cycles with its concept of thwarting mechanisms. While these institutional structures aim to stabilise the macro-financial system, they may also contradict each other due to unintended side effects. This paper argues that the understanding of thwarting mechanisms can be enriched by further integrating it with political economy literature on finance within the post-GFC institutional setup. It conceptualises unconventional monetary policy as a novel thwarting mechanism and analyses the contradictory implications for overall macro-financial stability with a particular focus on aggregate demand. It suggests three reasons why this thwarting mechanism failed to restore sustained economic growth in the post-crisis decade: First, sustained large-scale asset purchases perpetuate the structural drivers of financial dominance in political power relations, entrenching the role of the shadow banking system within the macro-financial order and impairing the development of other thwarting mechanisms. Second, unconventional monetary policy maintains the tenets of the inflation targeting regime and thereby sustains neoliberal macroeconomic governance with restrained fiscal policy. Third, it exacerbates preexisting wealth and income inequality by redistributing wealth towards asset owners, undermines consumer demand, and thus contributes to stagnation tendencies. Thus, this paper suggests that the contradictions of this novel post-GFC thwarting mechanism contribute to weaken economic growth and thus fail to restore macro-financial stability.

The asymmetric effects of quantitative tightening and easing on financial markets

We study the asymmetric impact of US quantitative tightening (QT) and easing (QE) on financial markets using high-frequency large-scale asset purchase surprises around FOMC announcements. We document that QT surprises since 2017 had larger and more persistent effects on US Treasury yields than QE surprises. Using numerous empirical decompositions of bond yields, we show that this asymmetry arises from the differential effect of QT vs. QE surprises on expectations of future short-term rates (linked to the so-called signalling channel) at shorter maturities.

Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy

We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific safety premia, we find that Sveriges Riksbank’s bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB’s QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects.

Whatever-it-takes policymaking during the pandemic

Central banks across the globe introduced large-scale asset purchase programs to address the unprecedented circumstances experienced during the pandemic. Many of these programs were announced as open-ended to shock-and-awe market participants and restore confidence in financial markets. This paper examines whether these whatever-it-takes announcements had larger effects than announcements with explicit limits on scale. We use a narrative approach to categorize announcements made by twenty-two central banks, and event study, propensity-score-matching, and local projection methods to measure the short-term effects of policy announcements on exchange rates and sovereign bond yields. We find that on average a central bank’s first whatever-it-takes announcement lowers 10-year bond yields by an additional 47 basis points relative to size-limited announcements, suggesting that communication of potential policy scale matters. Our results for yields hold for both advanced and emerging economies, while exchange rates go in opposing directions, muting their response when we group all countries together.

Effects of QE on sovereign bond spreads through the safe asset channel

AbstractWe show that through the safe asset channel the excess liquidity created by large scale asset purchases (QE) can lead to higher sovereign bond spreads in the euro area. This unintended effect is most likely in volatile market conditions when excess liquidity spurs demand for tradeable safe assets, pushing down the interest rate of these assets, which widens risk spreads. Outcomes of a panel regression model estimated for individual euro area countries confirm that the excess liquidity created by QE had an upward effect on sovereign bond spreads. It indicates that the safe asset channel dominates the usual portfolio rebalancing channel. For monetary policy the results imply that large scale asset purchases by QE are not an appropriate instrument to address country specific shocks.

Central bank asset purchases and lending: Impact on search frictions

We investigate the impact of two central bank policies, asset purchases and asset lending, on the search frictions in the government bond market in Japan. We build a search-theoretic model to explore the impact of a central bank’s securities lending facility (SLF) by introducing a central bank as a lender. We test model predictions using intraday data from an electronic platform for Japanese government bonds. First, we find large-scale asset purchases (LSAPs) increase order imbalance in the repurchase agreement (repo) market. Threshold analysis reveals that asset purchase amounts exceeding 0.18% of the outstanding, which corresponds to 38.98% of our sample, cause a significantly higher imbalance. Second, the SLF has a floor effect on the repo rate by affecting dealers’ choices between the repo market and the SLF. Third, the novel friction measures we test show that LSAPs and the SLF have opposite influences on bargaining power in the repo market.

The transmission of monetary policy shocks through the markets for reserves and money

This paper identifies supply and demand curves for bank reserves and a Divisia aggregate of monetary services within a structural vector autoregressive time-series model. Estimated over four sample periods spanning 1967 through 2020, the model illustrates how monetary policy actions can be interpreted with reference to their initial impact on bank reserves and the federal funds rate and their subsequent effects on Divisia money, nominal consumption spending, the aggregate nominal price level, and the unemployment rate. Model estimates attribute strong inflationary effects to monetary policy in the late 1960s and 1970s and also show that changes in the supply of reserves associated with the Fed's large-scale asset purchases since 2008 worked, as intended, to offset deflationary pressures and reduce unemployment. The model describes a much richer monetary policy process than one focused on interest rates alone.

Estimating the Fed’s unconventional policy shocks

Financial market responses to Fed monetary policy announcements are often very small, but sometimes very large and the mix of news contained in these announcements varies over time. I exploit these features of the data to estimate different types of Fed policy shocks. The resulting shocks can be naturally labeled as standard monetary policy, Odyssean forward guidance, large scale asset purchases and Delphic forward guidance. They affect risk-free interest rates, stock prices and the dollar on impact and have delayed but pronounced effects on corporate bond spreads and breakeven inflation rates.

The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases *

The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases *

Investor Heterogeneity and Large-Scale Asset Purchases

Investor Heterogeneity and Large-Scale Asset Purchases

Unconventional Monetary Policy and Long‐Term Interest Rates

AbstractThis paper constructs a survey‐based measure capturing the evolution of market's expectations of the Federal Reserve's Large‐Scale Asset Purchases (LSAP) program during 2008–18, and examines the transmission mechanism of unconventional monetary policy. Estimation results suggest that both signaling and portfolio balance channels of the LSAP were important in lowering long‐term interest rates; Moreover, the Federal Reserve's forward guidance policy had led to a gradual extension of market's projections of the duration of the LSAP, making its effects more persistent. Model estimation also explains the 2013 taper tantrum well, and suggests that the LSAP's effects might have declined during QE III.

Unconventional monetary policy in the Euro area: Impacts on loans, employment, and investment

AbstractUsing a dataset of bank‐ and regional‐level data, we study the effectiveness and heterogeneity of the transmission mechanism of the ECB's large scale asset purchases (LSAPs) to the real economy. Our results indicate that banks more exposed to government debt securities had higher growth of loans and loans relative to total assets than less exposed banks after the asset purchase programme (APP), but not after the pandemic emergency purchase programme (PEPP). Furthermore, our results demonstrate that regions where banks are more exposed to government securities exhibit more favorable outcomes after the APP in GDP, fixed capital formation, unemployment, and compensation of employees than regions with less exposed banks, via the bank lending channel. We argue that banks' exposure to LSAPs targeted assets and their geographical location is an important factor determining the magnitude and heterogeneity of the portfolio rebalancing transmission mechanism to the real economy.