Quantitative Tightening with Slow-Moving Capital

Zhengyang Jiang and Jialu Sun

No 32757, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document shifts in investor composition during quantitative tightening, which suggest that investors adjust their portfolios at different speeds. To understand its implications for bond valuation, we develop a general equilibrium model which highlights the dynamic interaction between heterogeneous investors. In the model, long-term investors have higher risk-taking capacity, but face a portfolio adjustment cost; liquidity traders have lower risk-taking capacity, but can trade freely. Our model predicts a novel overshooting pattern: when the central bank unwinds its bond purchase, slow adjustment by long-term investors requires liquidity traders to absorb the imbalance, who demand a higher risk premium that creates excessive bond price decline and volatility in the short run. As a result, quantitative tightening is not simply a symmetric reversal of quantitative easing.

JEL-codes: E5 G12 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
Note: AP IFM ME
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.nber.org/papers/w32757.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:32757

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w32757

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().