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Flow effects of central bank asset purchases on euro area sovereign bond yields: evidence from a natural experiment

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  • De Santis, Roberto A.
  • Holm-Hadulla, Fédéric

Abstract

We estimate the response of euro area sovereign bond yields to purchase operations under the ECBs Public Sector Purchase Programme (PSPP), using granular data on all PSPP-eligible securities at daily frequency. To avoid simultaneity bias in the estimated relationship between yields and purchase volumes, we exploit a PSPP design feature that renders certain securities temporarily ineligible for reasons unrelated to their yields. Using these temporary purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that the “flow effect” of PSPP operations has, on average, led to a temporary 7 basis-point decline in sovereign bond yields on the day of purchase. This impact estimate is well above those found in similar studies for the US; at the same time, our results imply that flow effects have accounted for only a limited share of the downward pressure of PSPP on sovereign yields, most of which instead derived from anticipation and announcement effects at the onset of the programme. JEL Classification: E52, E58, E65, G12

Suggested Citation

  • De Santis, Roberto A. & Holm-Hadulla, Fédéric, 2017. "Flow effects of central bank asset purchases on euro area sovereign bond yields: evidence from a natural experiment," Working Paper Series 2052, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172052
    Note: 185689
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    References listed on IDEAS

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    Cited by:

    1. Pelizzon, Loriana & Subrahmanyam, Marti G. & Tomio, Davide & Uno, Jun, 2018. "Central bank-driven mispricing," SAFE Working Paper Series 226, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. Eser, Fabian & Lemke, Wolfgang & Nyholm, Ken & Radde, Sören & Vladu, Andreea Liliana, 2019. "Tracing the impact of the ECB’s asset purchase programme on the yield curve," Working Paper Series 2293, European Central Bank.
    3. Lemke, Wolfgang & Werner, Thomas, 2017. "Dissecting long-term Bund yields in the run-up to the ECB's Public Sector Purchase Programme," Working Paper Series 2106, European Central Bank.
    4. Machiel van Dijk & Andrei Dubovik, 2018. "Effects of Unconventional Monetary Policy on European Corporate Credit," CPB Discussion Paper 372, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Nao Sudo & Masaki Tanaka, 2018. "Do Market Segmentation and Preferred Habitat Theories Hold in Japan? : Quantifying Stock and Flow Effects of Bond Purchases," Bank of Japan Working Paper Series 18-E-16, Bank of Japan.

    More about this item

    Keywords

    monetary policy; natural experiment; quantitative easing; sovereign yields;

    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
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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