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The rebalancing channel of QE: New evidence at the security level in the euro area

Working paper 756
Working Papers

Published: 08 December 2022

By: Tom Hudepohl

This paper examines portfolio rebalancing at the security level during the ECB’s Asset Purchase Programme (APP). Search for yield via portfolio rebalancing is one of the possible channels through which Quantitative Easing (QE) may affect real economic activity. This paper shows that during QE, European investors significantly increased their relative holdings of debt denominated in emerging market currencies. In addition, a significant rebalancing has taken place within the euro area, as investors increased their relative holdings of debt issued by vulnerable European countries. This increase has been driven by investors located in peripheral countries, while investors in other countries were net sellers. QE thus has a heterogeneous impact on security holdings across euro area countries and sectors. These findings are relevant for policymakers to assess the (side-)effects of QE and the potential impact of monetary tightening.

Keywords: Portfolio rebalancing; Quantitative Easing, Asset purchases; Unconventional monetary policy;Heterogeneity
JEL codes E52; E58; G10; G11; G15

Working paper no. 756

756 - The rebalancing channel of QE: New evidence at the security level in the euro area

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Research highlights

  • This paper examines portfolio rebalancing at the security level during the ECB’s Asset Purchase Programme (QE).
  • During QE, European investors significantly increased their relative holdings of debt denominated in emerging market currencies.
  • Moreover, within the euro area there has been significant rebalancing towards debt issued by the more vulnerable European countries.
  • This increase has been driven by investors from peripheral countries, while some investors in other countries were net sellers of peripheral bonds.
  • These findings are relevant for policy makers to assess the (side-)effects of QE and the potential impact of monetary tightening.

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