Quantitative easing, tightening, and the term premium channel in the Euro Area

Etienne Vaccaro-Grange ()
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Etienne Vaccaro-Grange: International Monetary Fund

Empirical Economics, 2025, vol. 69, issue 6, No 4, 3089-3125

Abstract: Abstract Long-term yields can be broken down into two components: a risk-neutral rate and a term premium. In this paper, I study the term premium channel of QE for the asset purchase programs of the European Central Bank, and later its related quantitative tightening (QT) period. I find a strong dominance of the term premium channel over the risk-neutral channel, both for the transmission of QE to the yield curve and to aggregate macroeconomic variables. However, this impact is not symmetric in the case of QT, where the risk-neutral channel is found to be more important. Overall, the term premium channel is found to have significantly raised core inflation and real GDP during the QE period, and was a major driving force for the macroeconomic variables from 2015 on, before its contribution turned negative as part of a lagged effect of QT, early 2024 on. Using cutting-edge econometric techniques, this paper provides a robust view of the importance of the little known term premium channel of QE/QT.

Keywords: Quantitative Easing; Quantitative Tightening; Term premium; Term structure model; SVAR (search for similar items in EconPapers)
JEL-codes: C32 E43 E44 E52 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02816-y

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