Effects of eligibility for central bank purchases on corporate bond spreads

BIS Working Papers  |  No 894  | 
22 October 2020
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 |  33 pages

Summary

Focus

Central banks in several advanced economies continue to rely on asset purchase programs to pursue their objectives. The costs and benefits of such policies, however, remain imperfectly understood. We try to shed light on these issues by studying the price effects of the corporate sector purchase programme (CSPP) of the European Central Bank, which involved a sizable transfer of relatively illiquid securities from the private sector to central bank balance sheets.

Contribution

We quantify the effect of the CSPP on the relative prices of the bonds eligible for purchase by employing a formal statistical framework of causal inference. Specifically, we make use of a regression discontinuity design specifically developed for evaluating programs such as the CSPP, in which eligibility is determined by an ordered categorical variable.

Findings

Our estimates suggest that the program did not alter the yield spreads of the eligible bonds, relative to those of noneligible bonds, issued between the announcement of the program in March 2016 and the end of net purchases in December 2018. Even when restricting attention to the phase during which the holdings of corporate bonds under the CSPP reached their highest level, or to countries in which a larger share of corporate bonds are held by long-term investors, no such effects on the relative prices of the eligible bonds are found.


Abstract

The causal effect of the European Central Bank's corporate bond purchase program on bond spreads in the primary market is evaluated,making use of a novel regression discontinuity design. The results indicate that the program did not, on average, permanently alter the yield spreads of eligible bonds relative to those of noneligible. Combined with evidence from previous studies, this finding suggests the effects of central bank asset purchase programs are in no way limited to the prices of the specific assets acquired.

JEL Classification: C21, G18

Keywords: asset purchase programs, corporate bonds, causal inference