A Portfolio Model of Quantitative Easing

26 Pages Posted: 9 May 2016

See all articles by Jens Henrik Eggert Christensen

Jens Henrik Eggert Christensen

FRB of San Francisco - Financial Research

Signe Krogstrup

National Bank of Denmark - Economics Department; Danmarks Nationalbank (The Central Bank of Denmark)

Date Written: April 2016

Abstract

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

Christensen, Jens Henrik Eggert and Krogstrup, Signe, A Portfolio Model of Quantitative Easing (April 2016). Peterson Institute for International Economics Working Paper No. 16-7, Available at SSRN: https://ssrn.com/abstract=2777690 or http://dx.doi.org/10.2139/ssrn.2777690

Jens Henrik Eggert Christensen (Contact Author)

FRB of San Francisco - Financial Research ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3115 (Phone)

Signe Krogstrup

National Bank of Denmark - Economics Department ( email )

1093 Copenhagen
Denmark

Danmarks Nationalbank (The Central Bank of Denmark) ( email )

Havnegade 5
Copenhagen, 1093
Denmark

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