Flow Effects of Central Bank Asset Purchases on Euro Area Sovereign Bond Yields: Evidence from a Natural Experiment

31 Pages Posted: 16 May 2017

See all articles by Roberto A. De Santis

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Federic Holm-Hadulla

European Central Bank (ECB)

Date Written: May 4, 2017

Abstract

We estimate the response of euro area sovereign bond yields to purchase operations under the ECB’s Public Sector Purchase Programme (PSPP), using granular data on all PSPP-eligible securities at daily frequency. To avoid simultaneity bias in the estimated relationship between yields and purchase volumes, we exploit a PSPP design feature that renders certain securities temporarily negligible for reasons unrelated to their yields. Using these temporary purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that the “flow effect” of PSPP operations has, on average, led to a temporary 7 basis-point decline in sovereign bond yields on the day of purchase. This impact estimate is well above those found in similar studies for the US; at the same time, our results imply that flow effects have accounted for only a limited share of the downward pressure of PSPP on sovereign yields, most of which instead derived from anticipation and announcement effects at the onset of the programme.

Keywords: quantitative easing; monetary policy; sovereign yields; natural experiment

JEL Classification: E52, E58, E65, G12

Suggested Citation

De Santis, Roberto A. and Holm-Hadulla, Federic, Flow Effects of Central Bank Asset Purchases on Euro Area Sovereign Bond Yields: Evidence from a Natural Experiment (May 4, 2017). ECB Working Paper No. 2052. Available at SSRN: https://ssrn.com/abstract=2968922

Roberto A. De Santis (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Federic Holm-Hadulla

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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