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Euro area quantitative easing: Large volumes, small impact?

Author(s): Daniel Gros

Date published: Feb 2018

SUERF Policy Note, Issue No 27
by Daniel Gros, Centre for European Policy Studies

JEL-codes: E43, E52, E58, G12, G18.
Keywords: Quantitative easing (QE), long term interest rates, yield curve, ECB, portfolio balance, risk premia, term premium, liability management.

This note explores the effectiveness of the ECB’s ‘quantitative easing’ program. It argues that an (unsterilized) bond purchase by a central bank is akin to shortening the maturity of outstanding government debt. It then points out that the government bond purchasing program in the euro area is implemented by national central banks (NCBs) operating on their own account, and that different NCBs buy different maturity baskets. The PSPP (Public Sector Purchasing Program) of the ECB is thus equivalent to a shortening of the maturities of national public debt which differs from country to country. Event studies suggest that the announcement of the PSPP coincided with reductions in risk and term premia, as well as some risk free rates. However, these effects were temporary and had dissipated a few months after the start of the actual bond buying despite the extraordinary size of the purchases, which over time amounted to 20% of GDP. Risk and term premia started tightening again only when the tapering of bond purchases started. The evidence suggests thus that the end of central bank bond purchases should not be destabilizing.

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SUERF Policy Note, Issue No 27SUERF Policy Note, Issue No 27

Euro area quantitative easing: Large volumes, small impact?Web version: Euro area quantitative easing: Large volumes, small impact?

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