Cheap Talk and the Efficacy of the ECB's Securities Market Programme: Did Bond Purchases Matter?

99 Pages Posted: 8 Oct 2015

See all articles by Michiel De Pooter

Michiel De Pooter

Board of Governors of the Federal Reserve System

DeSimone Rebecca

Columbia University - Columbia Business School

Robert F. Martin

Federal Reserve Board - International Finance Division

Seth Pruitt

Arizona State University (ASU) - Finance Department

Date Written: 2015-07-06

Abstract

In 2010, in response to an ever-worsening fiscal crisis, the ECB began purchasing sovereign debt from troubled euro-area countries through its Securities Market Programme (SMP). This program was designed to improve market functioning and restore the monetary transmission mechanism within the euro area. This paper does not test those ideals. Rather, we test whether SMP purchases systematically lowered peripheral yields and spreads. We find limited evidence of purchase effects but large announcement effects. In addition, on days in which the ECB was believed to have made large purchases, yields moved down, independent of the size of the ECB's purchases or even if the ECB conducted any purchase at all that week. In all, we conclude that the ECB's SMP influenced yields through a confidence channel rather than through any direct purchase effect. In the appendix to this paper we provide a detailed timeline of SMP purchases and market beliefs about purchase timing.

Keywords: Monetary policy, interest rates, recession, European Central Bank, asset purchases, euro area

JEL Classification: E20, E43, E52, F44

Suggested Citation

De Pooter, Michiel and Rebecca, DeSimone and Martin, Robert F. and Pruitt, Seth, Cheap Talk and the Efficacy of the ECB's Securities Market Programme: Did Bond Purchases Matter? (2015-07-06). FRB International Finance Discussion Paper No. 1139, Available at SSRN: https://ssrn.com/abstract=2671047 or http://dx.doi.org/10.2139/ssrn.2671047

Michiel De Pooter (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

DeSimone Rebecca

Columbia University - Columbia Business School

3022 Broadway
New York, NY 10027
United States

Robert F. Martin

Federal Reserve Board - International Finance Division ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-872-7564 (Phone)
202-736-5638 (Fax)

HOME PAGE: http://www.rfmartin.com

Seth Pruitt

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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