Portfolio Rebalancing Channel and the Effects of Large-Scale Stock and Bond Purchases

Sami Alpanda () and Serdar Kabaca

Staff Working Papers from Bank of Canada

Abstract: We quantify the effects of large-scale stock purchases by a central bank and compare these to bond purchases, using an estimated dynamic stochastic general equilibrium macro-finance model with nominal and real rigidities and portfolio rebalancing effects. The latter arise from imperfect substitutability between stocks and short- and long-term government bonds in mutual funds’ portfolios. Since households’ consumption-savings decisions are tied to expected portfolio returns, the required returns on all three assets affect overall demand in the economy. The model shows that the central bank’s equity purchases would lower the risk and term premiums on stocks and long-term bonds, respectively, and thereby stimulate economic activity. Since stocks comprise a larger share in asset portfolios and are less substitutable for short-term securities than long-term bonds are, the effects of stock purchases on aggregate demand are larger than those of similar-sized bond purchases.

Keywords: Business fluctuations and cycles; Economic models; Monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2025-12
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:25-38

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