Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Assets Purchase Program

Martijn (M.I.) Droes (), Ryan van Lamoen () and Simona Mattheussens ()
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Martijn (M.I.) Droes: University of Amsterdam & Amsterdam School of Real Estate; Tinbergen Institute, The Netherlands
Ryan van Lamoen: Dutch Central Bank
Simona Mattheussens: Dutch Central Bank

No 17-080/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper examines whether the ECB's Quantitative Easing (QE) policy is causing government bond prices to deviate from their fundamental value. We use a recent advance in the methodology to measure exuberant price behavior in financial time series introduced by Phillips et al. (2015). We extend this methodology and apply it to government bond prices. The results show that the QE policy substantially inflated government bond prices in Euro Area countries to such an extent that bond prices are no longer in line with the underlying fundamental value. We argue that careful monitoring is required when the QE policy is eventually reversed. The test procedure outlined in this paper provides a monitoring tool to do so.

Keywords: government bond yields; asset price bubbles; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 G12 G15 (search for similar items in EconPapers)
Date: 2017-09-05
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20170080

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