Effects of QE on Sovereign Bond Spreads Through the Safe Asset Channel

31 Pages Posted: 15 Aug 2019

Date Written: August 13, 2019

Abstract

We show that through the safe asset channel the excess liquidity created by QE can lead to higher sovereign bond spreads in the euro area. This unintended effect is most likely in stressed markets when excess liquidity spurs demand for tradeable safe assets, pushing down the interest rate of these assets, which widens risk spreads. Outcomes of a panel regression model estimated for individual euro area countries confirm that the excess liquidity created by QE had an upward effect on sovereign bond spreads. It indicates that the safe asset channel dominates the usual portfolio rebalancing channel. For monetary policy the results imply that QE is not an appropriate instrument to address country specific shocks.

Keywords: interest rates, central banks and their policies, monetary policy

JEL Classification: E43, E58, E52

Suggested Citation

van den End, Jan Willem, Effects of QE on Sovereign Bond Spreads Through the Safe Asset Channel (August 13, 2019). De Nederlandsche Bank Working Paper No. 647, Available at SSRN: https://ssrn.com/abstract=3436805 or http://dx.doi.org/10.2139/ssrn.3436805

Jan Willem van den End (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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