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Effects of eligibility for central bank purchases on corporate bond spreads

Summary:
BIS Working Papers  |  No 894  |  22 October 2020 by  Taneli Mäkinen, Fan Li, Andrea Mercatanti and Andrea Silvestrini PDF full text (352kb)  |  33 pages Summary Focus Central banks in several advanced economies continue to rely on asset purchase programs to pursue their objectives. The costs and benefits of such policies, however, remain imperfectly understood. We try to shed light on these issues by studying the price effects of the corporate sector purchase programme (CSPP) of the European Central Bank, which involved a sizable transfer

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BIS Working Papers  |  No 894  | 
22 October 2020
PDF full text
 (352kb)
 |  33 pages

Summary

Focus

Central banks in several advanced economies continue to rely on asset purchase programs to pursue their objectives. The costs and benefits of such policies, however, remain imperfectly understood. We try to shed light on these issues by studying the price effects of the corporate sector purchase programme (CSPP) of the European Central Bank, which involved a sizable transfer of relatively illiquid securities from the private sector to central bank balance sheets.

Contribution

We quantify the effect of the CSPP on the relative prices of the bonds eligible for purchase by employing a formal statistical framework of causal inference. Specifically, we make use of a regression discontinuity design specifically developed for evaluating programs such as the CSPP, in which eligibility is determined by an ordered categorical variable.

Findings

Our estimates suggest that the program did not alter the yield spreads of the eligible bonds, relative to those of noneligible bonds, issued between the announcement of the program in March 2016 and the end of net purchases in December 2018. Even when restricting attention to the phase during which the holdings of corporate bonds under the CSPP reached their highest level, or to countries in which a larger share of corporate bonds are held by long-term investors, no such effects on the relative prices of the eligible bonds are found.


Abstract

The causal effect of the European Central Bank's corporate bond purchase program on bond spreads in the primary market is evaluated,making use of a novel regression discontinuity design. The results indicate that the program did not, on average, permanently alter the yield spreads of eligible bonds relative to those of noneligible. Combined with evidence from previous studies, this finding suggests the effects of central bank asset purchase programs are in no way limited to the prices of the specific assets acquired.

JEL Classification: C21, G18

Keywords: asset purchase programs, corporate bonds, causal inference

International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

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