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Examining QE’s bang for the Buck: Does Quantitative easing reduce credit and liquidity risks and stimulate real economic activity?

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  • Cohen, Lior

Abstract

This paper investigates the ECB’s Corporate Sector Purchase Programme’s (CSPP) impact on European corporate bonds’ credit and liquidity risks and real economic activity. The results show that the CSPP’s announcement (“stock effect”) lowered the credit spread of eligible corporate bonds, measured by the G-spread, by ten basis points (bps) or 9.8%. The liquidity of eligible bonds also improved as their scaled bid-ask spread decreased by 2.6 bps or 4.6%. Moreover, for every 1 billion euros of ECB corporate bond monthly purchases (“flow effect”), the scaled bid-ask spread of eligible bonds declined by 0.6 bp from June 2016 to December 2018. As for economic activity, QE’s stock effect raised corporate debt – mainly for German firms – and the stock and flow effects stimulated dividend spending, especially for German and French firms. These results indicate that QE initially improved corporate bond operations and encouraged borrowing. Moreover, the CSPP continued to boost the liquidity of corporate bonds and dividend expenditure throughout its implementation, but not investment. Therefore, QE had limited success in stimulating economic activity.

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  • Cohen, Lior, 2022. "Examining QE’s bang for the Buck: Does Quantitative easing reduce credit and liquidity risks and stimulate real economic activity?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:intfin:v:79:y:2022:i:c:s1042443122000786
    DOI: 10.1016/j.intfin.2022.101596
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    Cited by:

    1. Cohen, Lior, 2023. "The effects of the BoJ's ETF purchases on equities and corporate investment," Economic Modelling, Elsevier, vol. 129(C).

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    More about this item

    Keywords

    quantitative easing (QE); Corporate bonds; CSPP; Corporate credit risk; Liquidity risk;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G01 - Financial Economics - - General - - - Financial Crises

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