Evaluating central bank asset purchases in a term structure model with a forward-looking supply factor

Juan Equiza-Goñi, Ricardo Gimeno, Antonio Moreno and Carlos Thomas
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Antonio Moreno: University of Navarra

No 2303, Working Papers from Banco de España

Abstract: The theoretical literature on term structure models emphasises the importance of the expected absorption of duration risk during the residual life of term bonds in order to understand the yield curve effect of central banks’ government bond purchases. Motivated by this, we develop a forward-looking, long-horizon measure of euro area government bond supply net of Eurosystem holdings, and use it to estimate the impact of the ECB’s asset purchase programmes in the context of a no-arbitrage affine term structure model. We find that an asset purchase shock equivalent to 10% of euro area GDP lowers the 10-year average yield of the euro area big four by 59 basis points (bp) and the associated term premium by 50 bp. Applying the model to the risk-free (OIS) yield curve, the same shock lowers the 10-year rate and term premium by 35 and 26 bp, respectively.

Keywords: monetary policy; ECB; asset purchase programme; yield curve; term premium; risk-neutral rate (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2023-01
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2303

DOI: 10.53479/25046

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