QT versus QE: who is in when the central bank is out?

Iryna Kaminska (), Alex Kontoghiorghes () and Walker Ray ()
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Iryna Kaminska: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Alex Kontoghiorghes: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Walker Ray: Federal Reserve Bank of Chicago, London School of Economics and CEPR

No 1108, Bank of England working papers from Bank of England

Abstract: We analyse the role of preferred habitat (PH) demand in the transmission of quantitative tightening (QT) and quantitative easing (QE) programmes. For this, we combine granular data from Bank of England QT and QE auctions with secondary market bond level transaction data. We find that when dealers traded on behalf of pension funds and insurance companies, their bidding at QE auctions was less elastic, in line with PH demand theory. In contrast, during QT auctions, there is no evidence of significant PH demand pressures. To account for the observed asymmetric demand effects during QE and QT, we build on and extend the constant elasticity demand model by Vayanos and Vila (2021), so that the PH demand elasticity can depend on available bond supply. We show that the decreased role of the PH demand channel during QT is consistent with the increased government bond issuance post the Covid-19 pandemic.

Keywords: Quantitative easing; quantitative tightening; central bank auctions; monetary policy; monetary transmission mechanism; preferred habitat; gilt market (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 G12 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2025-01-10
New Economics Papers: this item is included in nep-cba and nep-mon
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