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A Portfolio Model of Quantitative Easing

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  • Jens H. E. Christensen
  • Signe Krogstrup

Abstract

This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, 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 Papers 2016-19, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2016-19
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    References listed on IDEAS

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    Cited by:

    1. Christensen, Jens H.E. & Mirkov, Nikola N. & Zhang, Xin, 2025. "Quantitative easing and the supply of safe assets: Evidence from international bond safety premia," Journal of International Economics, Elsevier, vol. 157(C).
    2. 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.
    3. Stéphane Lhuissier & Urszula Szczerbowicz, 2022. "Monetary Policy and Corporate Debt Structure," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 497-515, June.
    4. repec:fip:fedfwp:98075 is not listed on IDEAS
    5. Tischer, Johannes, 2018. "Quantitative easing, portfolio rebalancing and credit growth: Micro evidence from Germany," Discussion Papers 20/2018, Deutsche Bundesbank.
    6. Ellen Ryan & Karl Whelan, 2023. "A Model of QE, Reserve Demand, and the Money Multiplier," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 407-439, March.
    7. 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.
    8. Jens H. E. Christensen & Xin Zhang, 2025. "Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy," Working Paper Series 2024-13, Federal Reserve Bank of San Francisco.
    9. Paludkiewicz, Karol, 2021. "Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio-Rebalancing Channel," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(2), pages 531-568, March.
    10. 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.
    11. Krogstrup, Signe & Tille, Cédric, 2018. "Foreign currency bank funding and global factors," Kiel Working Papers 2104, Kiel Institute for the World Economy (IfW Kiel).
    12. Jan Willem van den End, 2025. "Effects of QE on sovereign bond spreads through the safe asset channel," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 1143-1162, April.
    13. Arseneau, David M. & Rappoport W., David E. & Vardoulakis, Alexandros P., 2020. "Private and public liquidity provision in over-the-counter markets," Theoretical Economics, Econometric Society, vol. 15(4), November.
    14. Cawley, Cormac & Finnegan, Marie, 2019. "Transmission channels of central bank asset purchases in the Irish economy," MPRA Paper 96547, University Library of Munich, Germany.
    15. Kumhof, Michael & Salgado-Moreno, Mauricio, 2024. "Quantitative Easing and Quantitative Tightening: The Money Channel," CEPR Discussion Papers 19228, C.E.P.R. Discussion Papers.
    16. Jens H. E. Christensen & Nikola Mirkov & Xin Zhang, 2024. "Quantitative Easing and the Supply of Safe Assets: Evidence from International Bond Safety Premia," Working Paper Series 2023-23, Federal Reserve Bank of San Francisco.
    17. 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.
    18. Martijn Boermans & Tomás Carrera de Souza & Robert Vermeulen, 2025. "Quantitative easing and preferred habitat investors in the euro area bond market," Working Papers 826, DNB.
    19. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    20. Christian Grisse & Silvio Schumacher, 2017. "The response of long-term yields to negative interest rates: evidence from Switzerland," Working Papers 2017-10, Swiss National Bank.

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    Keywords

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    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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