Effects of QE on Sovereign Bond Spreads Through the Safe Asset Channel
31 Pages Posted: 15 Aug 2019
Date Written: August 13, 2019
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: Suggested Citation