The Euro Area Bond Free Float and the Implications for QE

Tobias S. Blattner and Michael A. S. Joyce

Journal of Money, Credit and Banking, 2020, vol. 52, issue 6, 1361-1395

Abstract: This paper examines how shocks to government bond duration risk held by price‐sensitive investors affect the euro area term structure of interest rates and the wider macroeconomy. We construct a new measure of the bond “free float,” which adjusts total debt for foreign official holdings and weights by residual maturity. Using a small macrofinance Bayesian Vector Autoregression (VAR) model, we estimate that the first round of asset purchases under the European Central Bank's (ECB) public sector purchase program reduced euro area 10‐year bond yields by around 30 bps in 2015. The positive impact on the output gap and inflation in 2016 was about 0.2 and 0.3 ppt, respectively.

Date: 2020
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https://doi.org/10.1111/jmcb.12685

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:6:p:1361-1395

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