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The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices

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  • Stephanie Titzck
  • Jan Willem van den End

Abstract

We analyse the effects of announcements of changes in the Eurosystem’s balance sheet size, duration and composition on inflation expectations, the exchange rate, the 10-year euro area government bond yield and stock returns, using local projections. We explicitly take into account interaction effects between the three balance sheet dimensions. We provide evidence for the duration extraction channel of monetary policy transmission as we find that the bond yield is sensitive to the combined impact of shocks to balance sheet size and duration. The exchange rate is also affected by a joint size-duration shock. Moreover, the bond yield and exchange rate are sensitive to the joint effect of changes in size and composition. The results indicate that interactions between balance sheet dimensions matter.

Suggested Citation

  • Stephanie Titzck & Jan Willem van den End, 2021. "The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices," The European Journal of Finance, Taylor & Francis Journals, vol. 27(12), pages 1186-1209, August.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:12:p:1186-1209
    DOI: 10.1080/1351847X.2020.1866051
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    Cited by:

    1. Broeders, Dirk & de Haan, Leo & Willem van den End, Jan, 2023. "How quantitative easing changes the nature of sovereign risk," Journal of International Money and Finance, Elsevier, vol. 137(C).

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