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The Liquidity of the Government Bond Market – What Impact Does Quantitative Easing Have? Evidence from Sweden

Author

Listed:
  • Blix Grimaldi, Marianna

    (Swedish National Debt Office)

  • Crosta, Alberto

    (Swedish Financial Supervisory Authority)

  • Zhang, Dong

Abstract

We consider the effects of quantitative easing on the liquidity of the Swedish government bonds. To capture multiple dimensions of liquidity we use several measures built on a unique and highly granular transaction-based dataset. We find that the Riksbank’s purchases of government bonds improved liquidity, but only to a point. In fact, the deterioration in the level of market liquidity from quantitative easing via the scarcity effect is significantly larger than the improvement from the demand effect. We find that such effects are nonlinear; they tend to be amplified when the share of the central bank holdings is larger than a threshold (40 percent).

Suggested Citation

  • Blix Grimaldi, Marianna & Crosta, Alberto & Zhang, Dong, 2021. "The Liquidity of the Government Bond Market – What Impact Does Quantitative Easing Have? Evidence from Sweden," Working Paper Series 402, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0402
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    References listed on IDEAS

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    Cited by:

    1. Tilman Bletzinger & William Greif & Bernd Schwaab, 2022. "Can EU Bonds Serve as Euro-Denominated Safe Assets?," JRFM, MDPI, vol. 15(11), pages 1-13, November.
    2. Christensen, Jens H.E. & Gillan, James M., 2022. "Does quantitative easing affect market liquidity?," Journal of Banking & Finance, Elsevier, vol. 134(C).
    3. Bank for International Settlements, 2023. "Central bank asset purchases in response to the Covid-19 crisis," CGFS Papers, Bank for International Settlements, number 68, december.

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    More about this item

    Keywords

    Market Liquidity; Government Bond Market; Quantitative Easing; Public Debt Management;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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