Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market

44 Pages Posted: 1 Aug 2018

See all articles by Fei Han

Fei Han

International Monetary Fund (IMF)

Dulani Seneviratne

International Monetary Fund (IMF)

Date Written: May 2018

Abstract

Quantitative easing could improve market liquidity through many channels such as relaxing bank funding constraints, increasing risk appetite, and facilitating trades. However, it can also reduce market liquidity when the increase in the central bank's holdings of certain securities leads to a scarcity of those securities and hence higher search costs in the market. Using security-level data from the Japanese government bond (JGB) market, this paper finds evidence of the scarcity (flow) effects of the Bank of Japan (BOJ)'s JGB purchases on market liquidity. Moreover, we also find evidence that such scarcity effects could dominate other effects when the share of the BOJ's holdings exceeds certain thresholds, suggesting that the flow effects may also depend on the stock.

Keywords: Liquidity, Asset markets, Bonds, Panel analysis, Econometric models, Japan, Quantitative easing, quantitative and qualitative monetary easing, market liquidity, Japanese government bond, scarcity effects, Models with Panel Data, Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation, Quantitative Policy Modeling, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: C23, C26, C54, E52, E58, G10, G14

Suggested Citation

Han, Fei and Seneviratne, Dulani, Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market (May 2018). Available at SSRN: https://ssrn.com/abstract=3221269 or http://dx.doi.org/10.2139/ssrn.3221269

Fei Han (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dulani Seneviratne

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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