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The market stabilization role of central bank asset purchases: High-frequency evidence from the COVID-19 crisis

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  • Bernardini, Marco
  • De Nicola, Annalisa

Abstract

We investigate the flow effects of the Eurosystem government bond purchases conducted in Italy during the early stages of the COVID-19 crisis. Using confidential high-frequency data and local projections, we find that the purchase of long-term bonds reduced corresponding yields by an average of 4 to 5 basis points per billion euros on impact. These effects persisted after the purchases and were strongly transmitted along the yield curve, leading to marked improvements in liquidity conditions, while remaining mostly confined to the domestic market. We further document that the effects were considerably more pronounced – nearly doubling in size – at the peak of the crisis, when market liquidity dried up and the euro area bond market became highly fragmented along national borders. Our findings point to a crucial role of actual purchases in stabilizing financial markets, beyond that of purchase announcements. They also support the rationale for more flexible and targeted interventions during periods of market distress.

Suggested Citation

  • Bernardini, Marco & De Nicola, Annalisa, 2025. "The market stabilization role of central bank asset purchases: High-frequency evidence from the COVID-19 crisis," Journal of International Money and Finance, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:jimfin:v:152:y:2025:i:c:s0261560624002444
    DOI: 10.1016/j.jimonfin.2024.103257
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    Keywords

    Monetary policy; Market functioning; Flow effects; Local projections; ECB; PEPP;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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