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QT versus QE: who is in when the central bank is out?

Author

Listed:
  • Kaminska, Iryna

    (Bank of England)

  • Kontoghiorghes, Alex

    (Bank of England)

  • Ray, Walker

    (Federal Reserve Bank of Chicago, London School of Economics and CEPR)

Abstract

We analyse the role of preferred habitat (PH) demand in the transmission of quantitative tightening (QT) and quantitative easing (QE) programmes. For this, we combine granular data from Bank of England QT and QE auctions with secondary market bond level transaction data. We find that when dealers traded on behalf of pension funds and insurance companies, their bidding at QE auctions was less elastic, in line with PH demand theory. In contrast, during QT auctions, there is no evidence of significant PH demand pressures. To account for the observed asymmetric demand effects during QE and QT, we build on and extend the constant elasticity demand model by Vayanos and Vila (2021), so that the PH demand elasticity can depend on available bond supply. We show that the decreased role of the PH demand channel during QT is consistent with the increased government bond issuance post the Covid-19 pandemic.

Suggested Citation

  • Kaminska, Iryna & Kontoghiorghes, Alex & Ray, Walker, 2025. "QT versus QE: who is in when the central bank is out?," Bank of England working papers 1108, Bank of England.
    • Handle: RePEc:boe:boeewp:1108
    as

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    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Dimitri Vayanos & Jean‐Luc Vila, 2021. "A Preferred‐Habitat Model of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 89(1), pages 77-112, January.
    3. Cantore, Cristiano & Meichtry, Pascal, 2024. "Unwinding quantitative easing: State dependency and household heterogeneity," European Economic Review, Elsevier, vol. 170(C).
    4. Jens H. E. Christensen & Glenn D. Rudebusch, 2012. "The Response of Interest Rates to US and UK Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 385-414, November.
    5. Giese, Julia & Joyce, Michael & Meaning, Jack & Worlidge, Jack, 2024. "Do preferred habitat investors exist? Evidence from the UK government bond market," Economics Letters, Elsevier, vol. 234(C).
    6. Nick McLaren & Ryan N. Banerjee & David Latto, 2014. "Using Changes in Auction Maturity Sectors to Help Identify the Impact of QE on Gilt Yields," Economic Journal, Royal Economic Society, vol. 0(576), pages 453-479, May.
    7. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    8. Swanson, Eric T., 2021. "Measuring the effects of federal reserve forward guidance and asset purchases on financial markets," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 32-53.
    9. Walker Ray & Michael Droste & Yuriy Gorodnichenko, 2024. "Unbundling Quantitative Easing: Taking a Cue from Treasury Auctions," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 3115-3172.
    10. Stefania D’Amico & Tim Seida, 2024. "Unexpected Supply Effects of Quantitative Easing and Tightening," The Economic Journal, Royal Economic Society, vol. 134(658), pages 579-613.
    11. Jappelli, Ruggero & Pelizzon, Loriana & Subrahmanyam, Marti G., 2023. "Quantitative easing, the repo market, and the term structure of interest rates," SAFE Working Paper Series 395, Leibniz Institute for Financial Research SAFE.
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    More about this item

    Keywords

    Quantitative easing; quantitative tightening; central bank auctions; monetary policy; monetary transmission mechanism; preferred habitat; gilt market;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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