Examining QE’s bang for the Buck: Does Quantitative easing reduce credit and liquidity risks and stimulate real economic activity?

Lior Cohen

Journal of International Financial Markets, Institutions and Money, 2022, vol. 79, issue C

Abstract: This paper investigates the ECB’s Corporate Sector Purchase Programme’s (CSPP) impact on European corporate bonds’ credit and liquidity risks and real economic activity. The results show that the CSPP’s announcement (“stock effect”) lowered the credit spread of eligible corporate bonds, measured by the G-spread, by ten basis points (bps) or 9.8%. The liquidity of eligible bonds also improved as their scaled bid-ask spread decreased by 2.6 bps or 4.6%. Moreover, for every 1 billion euros of ECB corporate bond monthly purchases (“flow effect”), the scaled bid-ask spread of eligible bonds declined by 0.6 bp from June 2016 to December 2018. As for economic activity, QE’s stock effect raised corporate debt – mainly for German firms – and the stock and flow effects stimulated dividend spending, especially for German and French firms. These results indicate that QE initially improved corporate bond operations and encouraged borrowing. Moreover, the CSPP continued to boost the liquidity of corporate bonds and dividend expenditure throughout its implementation, but not investment. Therefore, QE had limited success in stimulating economic activity.

Keywords: quantitative easing (QE); Corporate bonds; CSPP; Corporate credit risk; Liquidity risk (search for similar items in EconPapers)
JEL-codes: E22 E52 E58 G01 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:79:y:2022:i:c:s1042443122000786

DOI: 10.1016/j.intfin.2022.101596

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