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QT versus QE: who is in when the central bank is out?

Author

Listed:
  • Iryna Kaminska

    (Bank of England)

  • Alex Kontoghiorghes

    (Bank of England)

  • Walker Ray

    (Federal Reserve Bank of Chicago, London School of Economics and CEPR)

Abstract

We analyse the role of preferred habitat (PH) demand in the transmission of quantitative tightening (QT) and quantitative easing (QE) programmes. For this, we combine granular data from Bank of England QT and QE auctions with secondary market bond level transaction data. We find that when dealers traded on behalf of pension funds and insurance companies, their bidding at QE auctions was less elastic, in line with PH demand theory. In contrast, during QT auctions, there is no evidence of significant PH demand pressures. To account for the observed asymmetric demand effects during QE and QT, we build on and extend the constant elasticity demand model by Vayanos and Vila (2021), so that the PH demand elasticity can depend on available bond supply. We show that the decreased role of the PH demand channel during QT is consistent with the increased government bond issuance post the Covid-19 pandemic.

Suggested Citation

  • Iryna Kaminska & Alex Kontoghiorghes & Walker Ray, 2025. "QT versus QE: who is in when the central bank is out?," Bank of England Staff Working Paper series 1108, Bank of England.
    • Handle: RePEc:boe:boeewp:1108
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    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Giese, Julia & Joyce, Michael & Meaning, Jack & Worlidge, Jack, 2024. "Do preferred habitat investors exist? Evidence from the UK government bond market," Economics Letters, Elsevier, vol. 234(C).
    3. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    4. Walker Ray & Michael Droste & Yuriy Gorodnichenko, 2024. "Unbundling Quantitative Easing: Taking a Cue from Treasury Auctions," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 3115-3172.
    5. Stefania D’Amico & Tim Seida, 2024. "Unexpected Supply Effects of Quantitative Easing and Tightening," The Economic Journal, Royal Economic Society, vol. 134(658), pages 579-613.
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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