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The effectiveness of the ECB’s asset purchases at the lower bound

Giuseppe Grande, Adriana Grasso and Gabriele Zinna ()

No 541, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this research note, we assess – both theoretically and empirically – whether net asset purchases by the ECB can further reduce term premiums and bond yields in the euro area. Theory says that, at the effective lower bound, the duration extracted by the central bank is no longer sufficient to assess the price impact of the purchases. In fact, we show empirically that their impact is state-contingent, and is smaller the more the shadow rate is below the short-rate lower bound, and the lower the volatility of bond yields. Nevertheless, central bank asset purchases are still effective in reducing long-term term premiums and bond yields. Moreover, in the euro area, there is room to reduce the duration held by the market. Overall, asset purchases remain a viable tool at the disposal of the ECB for exerting downward pressure on yields.

Keywords: preferred-habitat theory; term premiums; effective lower bound; quantitative easing; large-scale asset purchases; forward guidance (search for similar items in EconPapers)
JEL-codes: E43 E52 G12 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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