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Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance

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Abstract

This article presents empirical evidence of a supply-induced transmission channel to long-term interest rates caused by a halt to government debt issuance. This is conceptually equivalent to a central bank-operated asset purchase program, commonly known as quantitative easing (QE). However, as it involves neither asset purchases nor associated creation of central bank reserves, we refer to it as passive QE. We introduce a general classification scheme of central bank balance sheet policies according to which passive QE is likely quite stimulative. For evidence, we analyze the response of Danish government bond risk premia to a temporary halt in government debt issuance announced by the Danish National Bank. The results suggest that declines in long-term yields during its enforcement reflected both reduced term premia, consistent with supply-induced portfolio balance effects, and increased safety premia, consistent with safe assets scarcity effects.

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  • Jens H. E. Christensen & Simon Thinggaard Hetland, 2024. "Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance," Working Paper Series 2023-24, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:96604
    DOI: 10.24148/wp2023-24
    Note: Original publication date: 2023-08-01.
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    2. Joseph E. Gagnon & Matthew Raskin & Julie Remache & Brian P. Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, vol. 17(May), pages 41-59.
    3. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 215-287.
    4. Jens H. E. Christensen & Signe Krogstrup, 2022. "A Portfolio Model of Quantitative Easing," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-39, December.
    5. Jens H. E. Christensen & Glenn D. Rudebusch, 2019. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt," The Review of Economics and Statistics, MIT Press, vol. 101(5), pages 933-949, December.
    6. Andreasen, Martin M. & Christensen, Jens H.E. & Rudebusch, Glenn D., 2019. "Term Structure Analysis with Big Data: One-Step Estimation Using Bond Prices," Journal of Econometrics, Elsevier, vol. 212(1), pages 26-46.
    7. Kim, Don H. & Singleton, Kenneth J., 2012. "Term structure models and the zero bound: An empirical investigation of Japanese yields," Journal of Econometrics, Elsevier, vol. 170(1), pages 32-49.
    8. Grisse, Christian & Nitschka, Thomas, 2015. "On financial risk and the safe haven characteristics of Swiss franc exchange rates," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 153-164.
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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
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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