Euro Area Quantitative Easing in a Portfolio Balance Model with Heterogeneous Agents and Assets

40 Pages Posted: 13 Feb 2019 Last revised: 23 Apr 2020

See all articles by Tina Koziol

Tina Koziol

University of Cape Town (UCT)

Jesper Riedler

ZEW – Leibniz Centre for European Economic Research

Joeri Schasfoort

University of Cape Town

Date Written: January 30, 2019

Abstract

We develop a portfolio balance model to study the effects of Quantitative Easing (QE) on international financial asset returns through the portfolio balance channel. Our two-country model features heterogeneity in assets and investor preferences. Both are crucial for a meaningful model-based impact assessment of QE. Preferences for asset maturity, asset class (bonds, equities and currencies) and whether an asset is issued at home or abroad influence the substitutability of assets, which drives the portfolio balance effect of central bank asset purchases. We calibrate the two countries in our model to the euro area and a representative sample of rest-of-the-world (ROW) countries in order to estimate the international impact of the ECB’s asset purchase program announced in January 2015. When simulating our model, we find that central bank asset purchases decrease both domestic and foreign yields. While the effects of QE on domestic yields and the exchange rate are rather modest and smaller than commonly assumed in the literature, domestic stock prices increase substantially.

Keywords: QE, Portfolio Balancing Channel, ECB, International Spillovers

Suggested Citation

Koziol, Tina and Riedler, Jesper and Schasfoort, Joeri, Euro Area Quantitative Easing in a Portfolio Balance Model with Heterogeneous Agents and Assets (January 30, 2019). ZEW - Centre for European Economic Research Discussion Paper, Available at SSRN: https://ssrn.com/abstract=3326435 or http://dx.doi.org/10.2139/ssrn.3326435

Tina Koziol

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Jesper Riedler (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Joeri Schasfoort

University of Cape Town ( email )

Cape Town, Western Cape
South Africa

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