A Portfolio Model of Quantitative Easing
26 Pages Posted: 9 May 2016
Date Written: April 2016
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.
Keywords: unconventional monetary policy, transmission, reserve-induced portfolio balance channel
JEL Classification: G11, E43, E50, E52, E58
Suggested Citation: Suggested Citation