Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program

39 Pages Posted: 17 Mar 2017

See all articles by Ryan Lamoen

Ryan Lamoen

De Nederlandsche Bank

Simona Mattheussens

De Nederlandsche Bank

Martijn Dröes

University of Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2017

Abstract

This paper examines the impact of Quantitative Easing (QE) in the Eurosystem on government bond yields and to what extent QE is causing government bond prices to deviate from their fundamental determinants. We apply a novel recursive estimation procedure developed by Phillips et al. (2015) to examine the existence of exuberant price behavior. The results show that government bond markets experienced exuberant price behavior in Euro Area countries following the announcement and implementation of several QE programs in 2014 and 2015. Especially the Public Sector Purchase Program (PSPP) contributed to exuberant price behavior as all countries experienced a divergence between observed and fundamental yield levels. However, almost no evidence of exuberance in government bond markets is found when QE policies are treated as drivers of government bond yields in addition to the traditional determinants. Given the influence of QE on government bond yields and prices, our findings imply that caution is warranted when this policy is eventually reversed.

Keywords: Government bond yields, asset price bubbles, monetary policy

JEL Classification: G12, G15, E52

Suggested Citation

Lamoen, Ryan and Mattheussens, Simona and Dröes, Martijn, Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program (March 15, 2017). De Nederlandsche Bank Working Paper No. 548, Available at SSRN: https://ssrn.com/abstract=2933567 or http://dx.doi.org/10.2139/ssrn.2933567

Ryan Lamoen (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Simona Mattheussens

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Martijn Dröes

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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