Transmission of Quantitative Easing: The Role of Central Bank Reserves

Jens H.E. Christensen and Signe Krogstrup

Issue
2015-06

Pages
60

JEL classification
G12, E43, E52, E58

Keywords
unconventional monetary policy, reserve-induced portfolio balance channel, term structure modeling

Year
2015

We argue that the issuance of central bank reserves per se can matter for the effectof central bank large-scale asset purchases-commonly known as quantitative easing- on long-term interest rates. This effect is independent of the assets purchased, and runs through a reserve-induced portfolio balance channel. For evidence we analyze the reaction of Swiss long-term government bond yields to announcements by the Swiss National Bank to expand central bank reserves without acquiring any long-lived securities. We find that declines in long-term yields following the announcements mainly reflected reduced term premiums suggestive of reserve-induced portfolio balance effects.