The Stock and Flow Effects of Large-Scale Asset Purchases: Evidence from Persistent Versus Transitory Shocks

Are the stock effects of large-scale asset purchases more potent and persistent relative to the flow effects? We find that positive shocks to the level of South African Reserve Bank (SARB) assets lower yields on long-term government, the unemployment rate, Gini coefficient and the ratio of government interest cost to its expenditure. The channels of transmission are via the lower yields on government bonds, an increase in GDP growth, employment growth and asset price growth. The historical decompositions of large-scale asset purchases (LSAPs) shocks to ten-year yields for the period 2004M1 to 2008M12 when the SARB started accumulating forex reserves, thus growing the size of its balance sheet, show that the ten-year yields declined more and for a prolonged period. The result show that the ten-year yields declined more and for a prolonged period due to positive shocks to the level (stock) of the SARB sheet compared to flows (changes). Thus, the stock effects of LSAPs exert more persistent and potent effects compared to flows. These results mean that the size, duration and composition of LSAPs matter. It matters how a given stock of asset purchases is accumulated and composed. This is because such parameters of the asset purchase programme interact with the monetary policy stance to influence financial and macro-economic variables.