The impact of corporate QE on liquidity: evidence from the UK
56 Pages Posted: 4 Mar 2019 Last revised: 24 Jul 2020
Date Written: March 1, 2019
Quantitative easing (QE) has become a key component of the monetary policy toolkit since the global financial crisis. However substantial uncertainty remains about the impact of QE on market liquidity. Identifying the impact is particularly challenging due to the potential for reverse causality, because liquidity considerations might affect purchases. To address this challenge, we study the Bank of England’s Corporate Bond Purchase Scheme (CBPS), in which the Bank of England purchased £10 billion of sterling corporate bonds via a series of auctions over 2016 and 2017. In particular, we use granular offer-level data from the CBPS auctions to construct proxy measures for the Bank of England’s demand for bonds and auction participants’ supply of bonds, allowing us to control for any reverse causality from liquidity to purchases. Across a wide range of transaction-based liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.
Keywords: quantitative easing, market liquidity, market-making, corporate bonds
JEL Classification: G12, G23, E52, E58
Suggested Citation: Suggested Citation