A game changer for public debt markets? Daniel Gros Rome, Seminar - - PowerPoint PPT Presentation

▶
a game changer for public
SMART_READER_LITE
LIVE PREVIEW

A game changer for public debt markets? Daniel Gros Rome, Seminar - - PowerPoint PPT Presentation

Mar 20, 2023 456 likes •828 views

QE A game changer for public debt markets? Daniel Gros Rome, Seminar LUISS, SEP March 8, 2018 Rome, March, 8, 2018 Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu Bernanke: the problem with QE

slide-1
SLIDE 1

“QE A game changer for public debt markets?

Daniel Gros

Rome, Seminar LUISS, SEP March 8, 2018

Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

Rome, March, 8, 2018

slide-2
SLIDE 2

2

In theory: Portfolio balance, a digression on the US, LSAP versus QE. In practice:

  • 1. QE euro: A debt management perspective (+

fiscal aspects).

  • 2. Measuring the impact of major ECB

decisions

  • 3. Event studies and the random walk

hypothesis.

  • 4. Conclusion on fiscal and monetary aspects.

Bernanke: “the problem with QE is it works in practice, but it doesn’t work in theory.”

Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

slide-3
SLIDE 3

Facts about LSAPS (in US)

  • QE1 was preceded by ‘LSAS’ 2007/8
  • QE1 did not increase balance sheet (was not

supposed to, and was not targeted at Treasury securities).

  • QE3 was by far the largest LSAP, but seemingly

had smallest effect. => All difficult to reconcile with portfolio balance view.

  • Centre for European Policy Studies •

www.ceps.eu

  • 3
slide-4
SLIDE 4

The Fed’s balance sheet and LSAPs

  • Centre for European Policy Studies •

www.ceps.eu

  • 4

1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 U.S. Treasury Securities Federal Agency Securities Repurchase agreement Foreign currency denominated assets Other assets

QE1 QE2 QE3 14% of GDP 11% of GDP

slide-5
SLIDE 5

Portfolio balance effects

  • Two conditions:
  • 1. Must have ‘preferred habitat’ investors.
  • 2. Must have asymmetry short- versus long-

term securities. (Otherwise some rates go up and others go down, with uncertain effect on demand – a basic point, often overlooked.)

  • 3. (Logical corollary of portfolio balance: higher

government debt means higher rates!)

  • Centre for European Policy Studies •

www.ceps.eu

  • 5
slide-6
SLIDE 6
  • Centre for European Policy Studies •

www.ceps.eu

  • 6

Portfolio balance effect requires asymmetry

Bond price Price short term paper

Quantity Quantity Supply after LSAP Demand curve Demand curve Supply of deposits before LSAP Supply of deposits after LSAP Supply treasuries before LSAP

slide-7
SLIDE 7

Portfolio balance effect requires asymmetry

  • Bond

price

  • Price short

term paper

  • Quant

ity

  • Quant

ity

  • Suppl

y after LSAP

  • Dema

nd curve

  • Dema

nd curve

  • Supply of deposits

before LSAP

  • Supply of deposits

after LSAP

  • Supply

treasuries before LSAP

slide-8
SLIDE 8

Portfolio balance effects

  • QE should flatten yield curve (central bank

buys long bonds and issues short term deposits). But mitigated by:

  • 1. In reality (euro area) NCBs must buy entire

curve as they bump against the ‘no blocking minority’ limit on longer terms bonds (in countries with little debt, Germany).

  • 2. ‘Halo’ effect ( et al.): securities with similar

maturities are close substitutes.

  • Centre for European Policy Studies •

www.ceps.eu

  • 8
slide-9
SLIDE 9

LSAPs and portfolio balance in the US

  • Centre for European Policy Studies •

www.ceps.eu

  • 9

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 2003-01-01 2003-05-01 2003-09-01 2004-01-01 2004-05-01 2004-09-01 2005-01-01 2005-05-01 2005-09-01 2006-01-01 2006-05-01 2006-09-01 2007-01-01 2007-05-01 2007-09-01 2008-01-01 2008-05-01 2008-09-01 2009-01-01 2009-05-01 2009-09-01 2010-01-01 2010-05-01 2010-09-01 2011-01-01 2011-05-01 2011-09-01 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01

Share of Federal Reserve holdings in total US federal debt held by public

slide-10
SLIDE 10

Quantitative Easing Central bank balance sheets and A debt management perspective

slide-11
SLIDE 11

Need to distinguish clearly different periods:

  • US QE1: financial market instability acute.
  • EA: no instability, aim to get inflation up.

Purpose of QE depends on state of financial markets

slide-12
SLIDE 12

QE on the balance sheet of the (consolidated) government (% GDP)

Assets

  • Few real assets 10
  • (Negative equity) 120
  • Government bonds

……………………………20

  • Total: 130

Liabilities

  • Debt held by the public

..110

  • Debt held by the Central

Bank …….20

  • Liabilities of central bank

towards commercial banks (excess reserves) ….20

  • Total: 130

Centre for European Policy Studies • www.ceps.eu 12

slide-13
SLIDE 13

13

QE = Monetary policy? Or rather debt management?

  • With own currency can consolidate central bank

and treasury.

  • QE = exchange of long term bonds against short

term central banks deposits.

  • => QE lowers average maturity of public debt.
  • QE could be undone by more long term issuance

by national treasuries; (Greenwood et al. (2016)) ……. also by higher deficits(!)

slide-14
SLIDE 14

14

PSPP = Monetary policy? Or rather national debt management?

  • Euro area QE (= PSPP) not considered ‘normal’

monetary policy operation: normal risk sharing rules do not apply to 80 % of purchases.

  • All government bonds bought by ‘home’ NCB on
  • wn account. (‘ECB buys Italian bonds’)
  • Different implementation across countries,

maturities differ substantially. => Monetary policy no longer ‘single’.

slide-15
SLIDE 15

15

Fiscal implications (debt service cost)

  • Fiscal gain: lower debt service as long term rates >

short term (cost of NCB liabilities zero or negative).

  • Fiscal gain low for Germany
  • E.g. ten year Bunds at 0.4 %, deposits at minus 0.4 %

=> total gain 0.8 percentage points on 20 % of GDP: savings = 0.16 % GDP – lower in reality since average maturity < 10 years

  • More substantial for periphery: IT: 2 % on BTPs

versus 0 cost of Target2 balances on 20 % of GDP => savings = 0.4 % of GDP. Debt service savings in some cases non-negligible (even with zero impact on Bunds and risk premia)

slide-16
SLIDE 16

16

Why should QE reduce risk spreads?

  • Since all government bonds purchased by ‘home’

NCB no risk sharing.

  • Assume risk premium = PD*LGD
  • LGD: goes up since liabilities of the NCBs cannot

be restructured.

  • PD: goes down: liabilities of NCBs (deposits or

Target2 balances) not ‘runnable’! QE reduces risk of ‘speculative attack’ on national government debt market but increases LGD. Impact of PSPP on risk premium uncertain

slide-17
SLIDE 17

17

In practice:

  • 1. QE euro: A debt management

perspective (+ fiscal aspects).

  • 2. Measuring the impact of major ECB

decisions

  • 3. Event studies and the random walk

hypothesis.

  • 4. Conclusion on fiscal and monetary

aspects.

Bernanke: “the problem with QE is it works in practice, but it doesn’t work in theory.”

Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

slide-18
SLIDE 18

Estimating the impact of the PSPP (1) comparative approach

Compare three major moves and how judged today

  • 1. LTRO (Sarko trade), large immediate impact, but

crisis resumed after few months = failure?

  • 2. OMT, generally perceived as having large and

permanent impact.

  • 3. QE (PSPP)?

For LTRO and OMT evidence is fall in risk premia months after announcement and implementation. Apply same metric to PSPP?

slide-19
SLIDE 19
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 2009Nov 2010Jan 2010Mar 2010May 2010Jul 2010Sep 2010Nov 2011Jan 2011Mar 2011May 2011Jul 2011Sep 2011Nov 2012Jan 2012Mar 2012May 2012Jul 2012Sep 2012Nov 2013Jan 2013Mar 2013May 2013Jul 2013Sep 2013Nov 2014Jan 2014Mar 2014May 2014Jul 2014Sep 2014Nov 2015Jan 2015Mar 2015May 2015Jul 2015Sep 2015Nov 2016Jan 2016Mar 2016May 2016Jul 2016Sep 2016Nov 2017Jan 2017Mar 2017May 2017Jul 2017Sep

Risk premia (relative to Germany)

Spain Italy Bund yield

LTRO, Sarkozy trade 'What ever it takes' QE starts : risk premium starts rising

slide-20
SLIDE 20

Estimating the impact of the PSPP Applying same metric as to LTRO and OMT

  • 1. Rates fall before and at PSPP announcement =

success?

  • 2. Rates rise steeply after implementation starts (like

LTRO) = failure?

  • 3. Usual argument: PSPP fully priced in after

announcement, rates after implementation not relevant for judgment. (Same reasoning should apply to OMT, in this case estimated impact would be much smaller.)

slide-21
SLIDE 21

0.0 0.5 1.0 1.5 2.0 2.5 2014Jan 2014Feb 2014Mar 2014Apr 2014May 2014Jun 2014Jul 2014Aug 2014Sep 2014Oct 2014Nov 2014Dec 2015Jan 2015Feb 2015Mar 2015Apr 2015May 2015Jun 2015Jul 2015Aug 2015Sep 2015Oct 2015Nov 2015Dec 2016Jan 2016Feb 2016Mar 2016Apr 2016May 2016Jun 2016Jul 2016Aug 2016Sep 2016Oct 2016Nov 2016Dec 2017Jan 2017Feb 2017Mar 2017Apr 2017May 2017Jun 2017Jul 2017Aug 2017Sep

Risk premia (relative to Germany)

Spain Italy

QE announcement QE implementation Increase in purchases Reduction in purchases

slide-22
SLIDE 22

Banca d’Italia buys BTP: impact on yield curve?

  • Centre for European Policy Studies •

www.ceps.eu

  • 22

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 2012-01-01 2012-03-01 2012-05-01 2012-07-01 2012-09-01 2012-11-01 2013-01-01 2013-03-01 2013-05-01 2013-07-01 2013-09-01 2013-11-01 2014-01-01 2014-03-01 2014-05-01 2014-07-01 2014-09-01 2014-11-01 2015-01-01 2015-03-01 2015-05-01 2015-07-01 2015-09-01 2015-11-01 2016-01-01 2016-03-01 2016-05-01 2016-07-01 2016-09-01 2016-11-01 2017-01-01 2017-03-01 2017-05-01 2017-07-01 2017-09-01

Italian yield curve: Ten year minus short term (treasury bills)

APP Announcement APP Introduction APP Increase APP Decrease

slide-23
SLIDE 23

Bundesbank bond buying and the German yield curve

  • Centre for European Policy Studies •

www.ceps.eu

  • 23

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2012-01-01 2012-03-01 2012-05-01 2012-07-01 2012-09-01 2012-11-01 2013-01-01 2013-03-01 2013-05-01 2013-07-01 2013-09-01 2013-11-01 2014-01-01 2014-03-01 2014-05-01 2014-07-01 2014-09-01 2014-11-01 2015-01-01 2015-03-01 2015-05-01 2015-07-01 2015-09-01 2015-11-01 2016-01-01 2016-03-01 2016-05-01 2016-07-01 2016-09-01 2016-11-01 2017-01-01 2017-03-01 2017-05-01 2017-07-01 2017-09-01

German yield curve: Ten year minus short term (residual maturity 6 months)

APP Announcement APP Introduction APP Increase APP Decrease

slide-24
SLIDE 24

The only real ‘Euro’ QE:

  • ECB buys supra-nationals (200 billion).
  • ECB holds 40 % of all EFSF/ESM bonds, rising

towards 50 % (much more than for DE, others).

  • Both ECB and ESM are owned by euro area
  • countries. The ECB finances itself with Target

balances vis-à-vis the NCBs and thus ultimately with excess reserves.

  • Did this asset exchange have any impact on

spreads?

  • Centre for European Policy Studies •

www.ceps.eu

  • 24
slide-25
SLIDE 25

25

In practice:

  • 1. QE euro: A debt management

perspective (+ fiscal aspects).

  • 2. Measuring the impact of major ECB

decisions

  • 3. Event studies and the random walk

hypothesis.

  • 4. Conclusion on fiscal and monetary

aspects.

Bernanke: “the problem with QE is it works in practice, but it doesn’t work in theory.”

Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

slide-26
SLIDE 26

Measuring the impact of QEuro

  • Event studies suggest:
  • announcements led to lower rates and falls in

risk premia of 50-100 bps (e.g. Altavilla et al.).

  • But interest rates only intermediate targets:

aim is to increase inflation: only modest increases in short term expected inflation and fall in 5/5 year forwards!

  • Centre for European Policy Studies •

www.ceps.eu

  • 26
slide-27
SLIDE 27

Announcement effect on inflation?

From Altavilla et al. Euro Stoxx (in %) Inflation swap rates (in basis points) 1-year 2-year 5-year 10-year 5/5 year forward Controlled event study 1-day 2-day 2 1 14 33 8 25 15 24 6 4

  • 3
  • 16

Standar d 1-day 2-da event study change change 3 5 9 5 7 7 15 14 6

  • 3
  • 3
  • 20
  • Centre for European Policy Studies •

www.ceps.eu

  • 27
slide-28
SLIDE 28

Measuring the impact of QEuro

  • Event studies can only measure ‘impact’ on

event day. But is it permanent?

  • Usual assumption: bond returns are random

walk => permanent effect.

  • Centre for European Policy Studies •

www.ceps.eu

  • 28
slide-29
SLIDE 29

Illustration of implicit reasoning of event studies

  • Centre for European Policy Studies •

www.ceps.eu

  • 29
slide-30
SLIDE 30

Measuring the impact of QEuro

  • Random walk hypothesis essential to establish

permanent effect.

  • Can be tested ….. And rejected for many

variables, especially spreads and inflation expectations.

  • Many bond returns and inflation expectations

at all horizons show (very significant) negative autocorrelation

  • => announcement effects transitory!
  • Centre for European Policy Studies •

www.ceps.eu

  • 30
slide-31
SLIDE 31

Spreads as a random walk?

  • Centre for European Policy Studies •

www.ceps.eu

  • 31

Country Probability (%) Sum of first 5 autocorrelation terms PT 0.1

  • 0.05

IT

  • 0.19

IR 2 0.04 GR

  • 0.06

ES

  • 0.19
slide-32
SLIDE 32
  • Centre for European Policy Studies •

www.ceps.eu

  • 32
  • 1
  • 0.9
  • 0.8
  • 0.7
  • 0.6
  • 0.5
  • 0.4
  • 0.3
  • 0.2
  • 0.1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Autocorrelation function of inflation expectations (by number of years out)

slide-33
SLIDE 33

33

Conclusions: Macro

Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

  • QE certain way to increase balance

sheet of central bank.

  • Large movement of assets, but medium

term impact on interest rates (and hence asset prices) uncertain.

  • No measurable improvement in

inflation expectations (some deterioration longer term out).

slide-34
SLIDE 34

34

QE: much ado about 2 Trillion (euro)

Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

  • QE in euro area: to 80 % parallel

national debt management.

  • Fiscal impact certain:
  • 1. Maturity of public debt down, but

less ‘runnable’.

  • 2. Modest interest savings.
slide-35
SLIDE 35

35

Overall conclusion

Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

QE (in euro area) = Monetary placebo and fiscal Aspirin => exit should have no adverse impact

  • n inflation (=> recovery is ‘self-

sustaining), but this might be difficult to admit.