The Impact of Size, Composition and Duration of the Central Bank Balance Sheet on Inflation Expectations and Market Prices

32 Pages Posted: 14 Mar 2019

See all articles by Stephanie Titzck

Stephanie Titzck

European Central Bank (ECB)

Jan Willem van den End

De Nederlandsche Bank

Date Written: March 8, 2019

Abstract

We analyse the effects of announcements of changes in the Eurosystem’s balance sheet size, duration and composition on inflation expectations, the exchange rate and the 10-year euro area government bond yield, using local projections. We explicitly take into account interaction effects between the three balance sheet dimensions. We provide evidence for the duration extraction channel of monetary policy transmission, as we find that the bond yield is sensitive to the combined impact of shocks to balance sheet size and duration. The exchange rate is also affected by a joint size-duration shock. Moreover, the bond yield and exchange rate are sensitive to the joint effect of changes in size and composition. The results indicate that interactions between balance sheet dimensions matter.

Keywords: central banks and their policies, monetary policy

JEL Classification: E58, E52

Suggested Citation

Titzck, Stephanie and van den End, Jan Willem, The Impact of Size, Composition and Duration of the Central Bank Balance Sheet on Inflation Expectations and Market Prices (March 8, 2019). De Nederlandsche Bank Working Paper No. 627 (2019), Available at SSRN: https://ssrn.com/abstract=3352377 or http://dx.doi.org/10.2139/ssrn.3352377

Stephanie Titzck (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jan Willem van den End

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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