Quantitative Easing and the Price-Liquidity Trade-Off

Abstract

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.

Debt management when monetary and fiscal policies clash: some empirical evidence

“…To achieve inflation targets in the post-crisis period, central banks created an environment of low or even negative interest rates and applied various unconventional monetary policy tools, such as quantitative easing, which influences government bond yield curves (Corradin & Maddaloni, 2017;Ferdinandusse, Freier, & Ristiniemi, 2017;Schlepper, Riordan, Hofer, & Schrimpf, 2017). In 2013, the CNB adopted an exchange rate commitment to intervene in the foreign exchange market.…”

Risiko Utama Dan Pengaruhnya Pada Profitabilitas Bank

“…Industri perbankan adalah industri yang diregulasi dengan ketat. Sebuah bank menghadapi trade off antara menaikkan pendapatan bunga dan tingkat risiko dari peningkatan biaya bunga (Ferdinandusse et al, 2020). Regulator tidak ingin bank mengambil risiko yang berlebihan karena akan membahayakan pihak ketiga yang meletakkan dana di bank.…”

The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme

“…The mixed results across studies might reflect differences in the operational design of the asset purchase programmes, as well as the nature of the markets in which they were implemented. Indeed, Ferdinandusse et al (2017) model the relationship between QE and liquidity theoretically and find that it is ambiguous.…”

“…Search frictions: Absent new issuance, asset purchases lead to a reduction in the quantity of bonds held by private investors. If there are search frictions, then this could reduce trading by making it more difficult for investors to be matched (Ferdinandusse et al, 2017). And if it becomes more difficult for dealers to source specific bonds in the secondary market, then the costs and risks of market-making could increase, reducing dealers' willingness to intermediate trades (Kandrac, 2018).…”