The Euro Area Bond Free Float and the Implications for QE

Tobias Sebastian Blattner

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Monetary Policy and Economic Impact Global Financial Crisis and Policies European Monetary and Fiscal Policies

Abstract

Abstract This paper examines how shocks to government bond duration risk held by price‐sensitive investors affect the euro area term structure of interest rates and the wider macroeconomy. We construct a new measure of the bond “free float,” which adjusts total debt for foreign official holdings and weights by residual maturity. Using a small macrofinance Bayesian Vector Autoregression (VAR) model, we estimate that the first round of asset purchases under the European Central Bank's (ECB) public sector purchase program reduced euro area 10‐year bond yields by around 30 bps in 2015. The positive impact on the output gap and inflation in 2016 was about 0.2 and 0.3 ppt, respectively.

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1980Macroeconomics and Reality 1969A General Equilibrium Approach To Monetary Theory 1992Interpreting the macroeconomic time series facts 2003Forecasting the Term Structure of Government Bond Yields 2003Zero Bound on Interest Rates and Optimal Monetary Policy 1991The Term Structure as a Predictor of Real Economic Activity 2011Identifying Government Spending Shocks: It's all in the Timing*2012The Aggregate Demand for Treasury Debt

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