ECB Policies involving Government Bond Purchases: Impact and Channels

ECB Policies involving Government Bond Purchases: Impact and Channels

By Arvind Krishnamurthy, Stefan Nagel, Annette Vissing-Jorgensen
September 15,2017Working Paper No. 3578

We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields.  We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37%, redenomination risk accounts for 13%, and market segmentation effects accounts for 50%. In Italy, Spain and Portugal, the default risk premium and market segmentation channel were the dominant policy channels. The redenomination risk premium channel also contributed for Spain and Portugal, but not Italy. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.