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A Portfolio Model of Quantitative Easing

Author

Listed:
  • Jens H. E. Christensen

    (Federal Reserve Bank of San Francisco)

  • Signe Krogstrup

    (Swiss National Bank and Peterson Institute for International Economics)

Abstract

This paper presents a portfolio model of asset price effects arising from large-scale asset purchases by central banks—commonly known as quantitative easing (QE). Two financial frictions, segmentation of the market for central bank reserves and imperfect asset substitutability, give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.

Suggested Citation

  • Jens H. E. Christensen & Signe Krogstrup, 2016. "A Portfolio Model of Quantitative Easing," Working Paper Series WP16-7, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp16-7
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    References listed on IDEAS

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    20. Carpenter, Seth & Demiralp, Selva & Ihrig, Jane & Klee, Elizabeth, 2015. "Analyzing Federal Reserve asset purchases: From whom does the Fed buy?," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 230-244.
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    Cited by:

    1. Gries, Thomas & Mitschke, Alexandra, 2019. "Systemic instability of the interbank credit market: A contribution to a resilient financial system," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203582, Verein für Socialpolitik / German Economic Association.
    2. David M. Arseneau & David E. Rappoport & Alexandros Vardoulakis, 2017. "Private and Public Liquidity Provision in Over-the-Counter Markets," Finance and Economics Discussion Series 2017-033, Board of Governors of the Federal Reserve System (U.S.).
    3. Arce, Óscar & Nuño, Galo & Thaler, Dominik & Thomas, Carlos, 2020. "A large central bank balance sheet? Floor vs corridor systems in a New Keynesian environment," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 350-367.
    4. Cormac Cawley & Marie Finnegan, 2019. "Transmission Channels of Central Bank Asset Purchases in the Irish Economy," Economies, MDPI, vol. 7(4), pages 1-25, September.
    5. Stépahne Lhuissier & Urszula Szczerbowicz, 2018. "Monetary Policy and Corporate Debt Structure," Working papers 697, Banque de France.
    6. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    7. Tischer, Johannes, 2018. "Quantitative easing, portfolio rebalancing and credit growth: Micro evidence from Germany," Discussion Papers 20/2018, Deutsche Bundesbank.
    8. Christian Grisse & Silvio Schumacher, 2018. "Term structure dynamics at low and negative interest rates—evidence from Switzerland," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-17, December.
    9. 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.
    10. Krogstrup, Signe & Tille, Cédric, 2018. "Foreign Currency Bank Funding and Global Factors," CEPR Discussion Papers 12933, C.E.P.R. Discussion Papers.
    11. Paludkiewicz, Karol, 2018. "Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio Rebalancing Channel," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181669, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    : unconventional monetary policy; transmission; reserve-induced portfolio balance channel;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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

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