Quantitative Easing and the Price-Liquidity Trade-Off

Sveriges Riksbank Working Paper Series No. 335

Riksbank Research Paper Series No. 159

42 Pages Posted: 8 Mar 2017

See all articles by M. Ferdinandusse

M. Ferdinandusse

European Central Bank (ECB)

Maximilian Freier

European Central Bank (ECB)

Annukka Ristiniemi

Sveriges Riksbank; Paris School of Economics (PSE)

Date Written: February 2017

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.

Keywords: Quantitative Easing, Liquidity, Search and Matching

JEL Classification: E52, E58, G12

Suggested Citation

Ferdinandusse, M. and Freier, Maximilian and Ristiniemi, Annukka, Quantitative Easing and the Price-Liquidity Trade-Off (February 2017). Sveriges Riksbank Working Paper Series No. 335; Riksbank Research Paper Series No. 159. Available at SSRN: https://ssrn.com/abstract=2917294 or http://dx.doi.org/10.2139/ssrn.2917294

M. Ferdinandusse

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Maximilian Freier

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Annukka Ristiniemi (Contact Author)

Sveriges Riksbank ( email )

SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.ristiniemi.con

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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