A Portfolio Model of Quantitative Easing

Jens H. E. Christensen and Signe Krogstrup

Issue
2016-19

Pages
28

JEL classification
G11, E43, E50, E52, E58

Keywords
unconventional monetary policy, transmission, reserve-induced portfolio balance channel

Year
2016

This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, commonly known as quantitative easing (QE). Two financial frictions—segmentation of the market for central bank reserves and imperfect asset substitutability—give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.