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ECB Policies Involving Government Bond Purchases: Impact and Channels

Arvind Krishnamurthy, Stefan Nagel, Annette Vissing-Jorgensen

NBER Working Paper No. 23985
Issued in November 2017
NBER Program(s):Asset Pricing Program, Corporate Finance Program, International Finance and Macroeconomics Program, Monetary Economics Program

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% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.

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Document Object Identifier (DOI): 10.3386/w23985

Published: Arvind Krishnamurthy & Stefan Nagel & Annette Vissing-Jorgensen, 2018. "ECB Policies Involving Government Bond Purchases: Impact and Channels*," Review of Finance, vol 22(1), pages 1-44.

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