Quantitative tightening? Britain’s 1980s experiment with overfunding

This paper presents the first in-depth empirical assessment of the Bank of England’s ‘overfunding’ policy, a neglected historical episode that may offer insights about quantitative tightening. Overfunding – government bond issuance in excess of fiscal financing needs – was used as an active monetary policy tool in the early 1980s to slow money growth. Exploiting high frequency issuance announcements and a novel external instrument derived from money market segmentation, I show that overfunding shocks had countervailing effects on asset prices. Excess gilt issuance raised long-term yields, via a portfolio balance channel, but reduced short-term rates, potentially through signalling effects. These offsetting forces led to limited effects on inflation and monetary aggregates. This offers a valuable insight for policymakers now – that the different channels of quantitative tightening can be exploited to calibrate the aggregate effects of balance sheet unwind.