ECB Policies Involving Government Bond Purchases: Impacts and Channels

65 Pages Posted: 30 Oct 2017

See all articles by Arvind Krishnamurthy

Arvind Krishnamurthy

Stanford Graduate School of Business; National Bureau of Economic Research (NBER); Stanford University - Stanford Institute for Economic Policy Research

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Annette Vissing-Jorgensen

National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business

Date Written: October 2017

Abstract

We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields.  We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.

Suggested Citation

Krishnamurthy, Arvind and Nagel, Stefan and Vissing-Jorgensen, Annette, ECB Policies Involving Government Bond Purchases: Impacts and Channels (October 2017). CEPR Discussion Paper No. DP12399, Available at SSRN: https://ssrn.com/abstract=3061832

Arvind Krishnamurthy (Contact Author)

Stanford Graduate School of Business ( email )

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Stefan Nagel

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research ( email )

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Annette Vissing-Jorgensen

National Bureau of Economic Research (NBER)

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University of California Berkeley, Haas School of Business ( email )

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