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Quantitative easing and the price-liquidity trade-off


  • Ferdinandusse, Marien

    () (European Central Bank)

  • Freier, Maximilian

    () (European Central Bank)

  • Ristiniemi, Annukka

    () (Monetary Policy Department, Central Bank of Sweden)


We present a search theoretic model of over-the-counter debt with quantitative easing (QE). The impact of central bank asset purchases on yields depend on market tightness, which is determined by shares of preferred habitat investors. The model predicts that the impact of government bond purchases is higher in countries with a higher share of preferred habitat investors. Furthermore, there is a trade-off with liquidity, which is not present in other models of QE. We present a new index for the share of preferred habitat investors holding government bonds in Eurozone countries, based on the ECB's securities and holdings statistics, which we use to match the impact of QE on the observed yield changes in data and to test our model.

Suggested Citation

  • Ferdinandusse, Marien & Freier, Maximilian & Ristiniemi, Annukka, 2017. "Quantitative easing and the price-liquidity trade-off," Working Paper Series 335, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0335

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    Cited by:

    1. Linas Jurksas & Hector Carcel, 2019. "Euro Area Government Bond Yield and Liquidity Dependence during different Monetary Policy Accommodation Phases," Bank of Lithuania Working Paper Series 60, Bank of Lithuania.
    2. Burlon, Lorenzo & Notarpietro, Alessandro & Pisani, Massimiliano, 2019. "Macroeconomic effects of an open-ended asset purchase programme," Journal of Policy Modeling, Elsevier, vol. 41(6), pages 1144-1159.
    3. Boneva, L. & Elliott, D. & Kaminska, I. & Linton, O. & McLaren, N. & Morley, B., 2019. "The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme," Cambridge Working Papers in Economics 1937, Faculty of Economics, University of Cambridge.
    4. Martijn Boermans & Viacheslav Keshkov, 2018. "The impact of the ECB asset purchases on the European bond market structure: Granular evidence on ownership concentration," DNB Working Papers 590, Netherlands Central Bank, Research Department.

    More about this item


    Quantitative easing; liquidity; search and matching;

    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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