Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-22T16:27:55.563Z Has data issue: false hasContentIssue false
  • English
  • Français

The Transmission of Unconventional Monetary Policy in UK Government Debt Markets

Published online by Cambridge University Press:  01 January 2020

Jack Meaning  and
James Warren
James Warren
Affiliation:
National Institute of Economic and Social Research
Get access Rights & Permissions [Opens in a new window]

Abstract

Through its quantitative easing programme the Bank of England has looked to manage the supply of nominal UK government securities in order to lower interest rates. In doing so it has removed more than 25 per cent of the overall supply of those securities from the publicly accessible market. The benchmark New Keynesian model suggests this should only have an impact on interest rates insofar as it affects expectations of future policy rates, whilst alternative theoretical frameworks imply a direct effect of changes in supply onto yields. Our aim is to test for the existence of these potential transmission mechanisms. We find empirical evidence to support the existence of both channels. Our analysis suggests the Bank's quantitative easing programme reduced yields by around 25 basis points through the supply channel alone. Importantly, we find that such supply effects have remained significant in recent years, suggesting that as quantitative easing is unwound the increase in publicly available supply will put upward pressure on interest rates. Lastly we highlight the monetary-fiscal interaction inherent in our result and discuss some of the issues it raises for policymakers.

Keywords

quantitative easingunconventional monetary policyasset purchasesmonetary-fiscalE520E580E630
Type
Research Articles
Information
National Institute Economic Review , Volume 234 , November 2015 , pp. R40 - R47
Copyright
Copyright © 2015 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors would like to thank Tony Yates, Oriol Carreras and Rebecca Piggott for their insightful comments and Michele Bernini for his invaluable technical assistance.

References

Andrés, J., Lopez-Salido, J.D. and Nelson, E. (2004), ‘Tobin's imperfect asset substitution in optimizing general equilibrium’, Journal of Money, Credit and Banking, 36(4), pp. 665–90.CrossRefGoogle Scholar
Banerjee, R., Latto, D. and McLaren, N. (2012), ‘Using changes in auction maturity sectors to help identify the impact of QE on gilt yields’, Bank of England Quarterly Bulletin, Q2.Google Scholar
Benford, J., Berry, S., Nikolov, K. and Young, C. (2009), ‘Quantitative easing’, Bank of England Quarterly Bulletin, 49, 2, pp. 90–100.Google Scholar
Bernanke, B. (2014), ‘Central banking after the Great Recession: lessons learned and challenges ahead’, speech given at the Brookings Institute.Google Scholar
Breedon, F., Chadha, J.S. and Waters, A. (2012), ‘The financial market impact of UK quantitative easing’, Oxford Review of Economic Policy, Oxford University Press, 28(4), pp. 702–28, Winter.Google Scholar
Caglar, E., Chadha, J.S., Meaning, J., Warren, J and Waters, A. (2015), ‘Central bank balance sheet policies: three views from the DSGE literature’ in Chadha, J.S. and Holly, S. (eds), Interest Rates, Prices and Liquidity, Cambridge, Cambridge University Press.Google Scholar
Culbertson, J.M. (1957), ‘The term structure of interest rates’, Quarterly Journal of Economics, 71, pp. 485–517.CrossRefGoogle Scholar
D'Amico, S., English, W., López-Salido, D. and Nelson, E. (2012), ‘The Federal Reserve's large-scale asset purchase programmes: rationale and effects’, Economic Journal, Royal Economic Society, 122(564), pp. F415–46, November.Google Scholar
D'Amico, S. and King, E. (2010), ‘Flow and stock effects of large-scale treasury purchases’, Federal Reserve Board Finance and Economics Discussion Series, 2010.52.CrossRefGoogle Scholar
Eggertson, G. and Woodford, M. (2003), ‘The zero bound on interest rates and optimal monetary policy’, Brookings Papers on Economic Activity, 1, pp. 139–233.CrossRefGoogle Scholar
Greenwood, R., Hanson, S.G., Rudolph, J.S and Summers, L. (2014). ‘Government debt management at the zero lower bound’, Hutchins Centre on Fiscal and Monetary Policy, Brookings. Working paper #5.Google Scholar
Joyce, M., Lasaosa, A., Stevens, I. and Tong, M. (2010), ‘The financial market impact of quantitative easing’, Bank of England Working paper, No.393.Google Scholar
Joyce, M., Miles, D., Scott, A. and Vayanos, D. (2012), ‘Quantitative easing and unconventional monetary policy – an introduction’, The Economic Journal, 122 (November), F271–F288.CrossRefGoogle Scholar
Kirby, S. and Meaning, J. (2015), ‘Impacts of the Bank of England's asset purchases on the public finances’, National Institute Economic Review, 232, May.CrossRefGoogle Scholar
Meaning, J. and Zhu, F. (2011), ‘The impact of recent central bank asset purchase programmes’, BIS Quarterly Review, December.Google Scholar
Miles, D. and Schanz, J. (2014), ‘The relevance or otherwise of the central bank's balance sheet’, CESIFO Working paper, No. 4615.Google Scholar
Modigliani, F. and Sutch, R.C. (1966), ‘Innovations in interest rate policy’, American Economic Review, Papers and Proceedings, 56(2), pp. 178–97.Google Scholar
Tobin, J. (1963), ‘An essay on the principles of debt management’, in Fiscal and Debt Management Policies, Englewood Cliffs, N.J.; Prentice Hall, pp. 143–218.Google Scholar
Tobin, J. (1969), ‘A general equilibrium approach to monetary theory’, Journal of Money, Credit and Banking, 1, February, pp. 15–29.CrossRefGoogle Scholar
Vayanos, D. and Vila, J. (2009), ‘A preferred-habitat model of the term structure of interest rates’, CEPR Discussion Paper 7547, LSE.CrossRefGoogle Scholar
Wallace, N. (1981), ‘A Modigliani-Miller theorem for open-market operations’, American Economic Association, American Economic Review, 71(3), pp. 267–74, June.Google Scholar