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Effects of Central Bank Purchase Eligibility on Corporate Bond Spreads

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Summary

Focus

Central banks in several advanced economies continue to rely on asset purchase programs to achieve their goals. However, the costs and benefits of such policies remain imperfectly understood. We attempt to shed light on these questions by studying the price effects of the European Central Bank’s Corporate Sector Purchase Program (CSPP), which resulted in a large 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 bonds eligible for purchase using a formal statistical framework of causal inference. Specifically, we use a specially developed regression discontinuity model to evaluate programs such as the CSPP, in which eligibility is determined by an ordered categorical variable.

Results

Our estimates suggest that the program did not change the yield spreads of eligible bonds, relative to those of ineligible bonds, issued between the announcement of the program in March 2016 and the end of net purchases in December 2018. limiting attention to the phase in which CSPP corporate bond holdings have peaked, or to countries where a larger share of corporate bonds is held by long-term investors, no such effect on the relative prices of eligible bonds is observed.


Summary

The causal effect of the European Central Bank’s corporate bond buying program on bond spreads in the primary market is assessed, using a new regression discontinuity model. The results indicate that the program did not, on average, permanently alter the yield spreads of eligible bonds relative to those of ineligible bonds. Combined with evidence from previous studies, this result suggests that the effects of central bank asset purchase programs are by no means limited to the prices of the specific assets acquired.

JEL Rating: C21, G18

Keywords: asset purchase programs, corporate bonds, causal inference