QE in the euro area: Has the PSPP benefited peripheral bonds?

Ansgar Belke and Daniel Gros

No 803, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: The asset purchase programme of the euro area, active between 2015 and 2018, constitutes an interesting special case of Quantitative Easing (QE) because the ECB's Public Sector Purchase Programme (PSPP) involved the purchase of peripheral euro area government bonds, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases by a national central bank of the bonds of their own sovereign should increase the risk for the remaining private bond holders. This might seem incompatible with the observation that risk spreads on peripheral bonds fell when QE in the euro area was announced. However, the initial fall in risk premiums may have been due to expectations of the bond purchases proving effective in lowering risk-free rates. When these expectations were disappointed, risk premiums returned to their initial level. Formal statistical tests confirm that indeed risk premiums on peripheral bonds did not follow a random walk (contrary to what is assumed in event studies). Nor did the announcements of bond buying change the stochastics of these premiums. There is thus no reason to consider the impact effect to have been permanent.

Keywords: European Central Bank; quantitative easing; unconventional monetary policies; spreads; structural breaks; time series econometrics (search for similar items in EconPapers)
JEL-codes: E43 E58 G12 G15 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: QE in the euro area: Has the PSPP benefited peripheral bonds? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:803

DOI: 10.4419/86788931

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