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Central Banks’ Corporate Bond Purchases: Impact and Channels

Paper Session

Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM

Atlanta Marriott Marquis, International 8
Hosted By: American Economic Association
  • Chair: Egon Zakrajsek, Federal Reserve Board

Credit Easing versus Quantitative Easing: Evidence from Corporate and Government Bond Purchase Programs

Stefania DAmico
,
Federal Reserve Bank of Chicago
Iryna Kaminska
,
Bank of England

Abstract

Using security-level data on corporate bond prices and amounts purchased by the Bank of England (BoE) during the course of the Corporate Bond Purchase Scheme (CBPS), we quantify the stock effect of this program and show that the size and channels of its impact vary with the quality of the eligible bonds. In particular, by controlling for the purchases of substitutes, we can determine how localized the price impacts are, shedding light on the extent of the pass-thorough to similar assets and on the degree of segmentation in corporate bond markets. In addition, the ability to control also for the BoE’s contemporaneous security-level purchases of government bonds allows (i) direct measurement of the pass-through of government bond purchases to corporate bond prices, and (ii) comparison of the estimates of corporate bond price elasticities to government and corporate bond purchases, respectively. This can improve our understanding of the relative efficacy of quantitative easing and credit easing. In other words, our analysis is a first attempt to address the following question: to reduce households’ and firms' borrowing costs, is it more effective to buy government bonds and rely on financial institutions/arbitrage relations to transmit the impact to private yields or to buy directly privately-issued securities (i.e., MBS and corporate)? Finally, comparing the reaction of corporate bond prices and equity prices around the CBPS announcement, we show that it was mostly beneficial to eligible corporate bonds but did not have immediate macro-spillovers. This, together with the analysis mentioned above, leads us to conclude that most of the channels through which the CBPS operated were specific to the corporate bond market.

Making Room for the Needy: The Credit-Reallocation Effects of the ECB’s Corporate QE

Oscar Arce
,
Bank of Spain
Ricardo Gimeno
,
Bank of Spain
Sergio Mayordomo
,
Bank of Spain

Abstract

We analyse how the ECB’s purchases of corporate bonds under its Corporate Sector Purchase Programme (CSPP) affected the financing of Spanish firms. We first document that the announcement of the CSPP in March 2016 raised the firms’ propensity to issue bonds. The flipside was a drop in the demand for bank loans by bond issuers. Around 75% of the drop in loans previously given to debt issuers was redirected to other smaller non-bond issuing firms, which led them to raise investment. We document that although the ECB’s Targeted Longer Term Refinancing Operations (TLTRO) did not cause the previous reallocation of credit, they contributed to amplify the effect of the CSPP.

The Capital Structure Channel of Monetary Policy

Benjamin Grosse-Rueschkamp
,
European School of Management and Technology
Sascha Steffen
,
Frankfurt School of Finance & Management
Daniel Streitz
,
Copenhagen Business School

Abstract

We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low tier-1 ratios and high nonperforming loans increase lending to private (and profitable) firms, which experience a growth in investment. The credit reallocation increases banks’ risk-taking in corporate credit.

The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme

Lena Boneva
,
Bank of England
David Elliott
,
Bank of England
Iryna Kaminska
,
Bank of England
Oliver Linton
,
University of Cambridge
Ben Morley
,
Bank of England

Abstract

In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to £10bn of sterling corporate bonds. To investigate the impact of these purchases on liquidity, we create a novel dataset that combines transaction-level data from the secondary corporate bond market with proprietary offer-level data from the CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is potentially impacted by reverse causality, because liquidity considerations might impact purchases. But the offer-level data allow us to construct proxy measures for the BoE's demand for bonds and auction participants' supply of bonds, meaning that we can control for the impact of liquidity on purchases. Across a range of liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.
Discussant(s)
Andrea Vedolin
,
Boston University
Thomas King
,
Federal Reserve Bank of Chicago
Ralf Meisenzahl
,
Federal Reserve Board
Filip Zikes
,
Federal Reserve Board
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • E4 - Money and Interest Rates