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The Euro Area Bond Free Float and the Implications for QE
Author(s) -
BLATTNER TOBIAS S.,
JOYCE MICHAEL A. S.
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12685
Subject(s) - bond , economics , monetary economics , inflation (cosmology) , government bond , bayesian vector autoregression , vector autoregression , float (project management) , yield curve , asset (computer security) , interest rate , government debt , maturity (psychological) , monetary policy , debt , bond market , econometrics , macroeconomics , bayesian probability , finance , statistics , mathematics , psychology , developmental psychology , physics , management , computer security , theoretical physics , computer science
This paper examines how shocks to government bond duration risk held by price‐sensitive investors affect the euro area term structure of interest rates and the wider macroeconomy. We construct a new measure of the bond “free float,” which adjusts total debt for foreign official holdings and weights by residual maturity. Using a small macrofinance Bayesian Vector Autoregression (VAR) model, we estimate that the first round of asset purchases under the European Central Bank's (ECB) public sector purchase program reduced euro area 10‐year bond yields by around 30 bps in 2015. The positive impact on the output gap and inflation in 2016 was about 0.2 and 0.3 ppt, respectively.