Working Paper

Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance

Abstract: This article presents empirical evidence of a supply-induced transmission channel to long-term interest rates caused by a halt to government debt issuance. This is conceptually equivalent to a central bank-operated asset purchase program, commonly known as quantitative easing (QE). However, as it involves neither asset purchases nor associated creation of central bank reserves, we refer to it as passive QE. We introduce a general classification scheme of central bank balance sheet policies according to which passive QE is likely quite stimulative. For evidence, we analyze the response of Danish government bond risk premia to a temporary halt in government debt issuance announced by the Danish National Bank. The results suggest that declines in long-term yields during its enforcement reflected both reduced term premia, consistent with supply-induced portfolio balance effects, and increased safety premia, consistent with safe assets scarcity effects.

JEL Classification: E43; E47; G12; G13;

https://doi.org/10.24148/wp2023-24

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2024-05-15

Number: 2023-24

Note: Original publication date: 2023-08-01.