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

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  • Jan Willem van den End

Abstract

We show that through the safe asset channel the excess liquidity created by QE can lead to higher sovereign bond spreads in the euro area. This unintended effect is most likely in stressed markets 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 QE is not an appropriate instrument to address country specific shocks.

Suggested Citation

  • Jan Willem van den End, 2019. "Effects of QE on sovereign bond spreads through the safe asset channel," DNB Working Papers 647, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:647
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    References listed on IDEAS

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    More about this item

    Keywords

    interest rates; central banks and their policies; monetary policy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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