Staff Working Paper No. 782
By Lena Boneva, David Elliott, Iryna Kaminska, Oliver Linton, Nick McLaren and Ben Morley
Quantitative easing (QE) has become a key component of the monetary policy toolkit since the global financial crisis. However substantial uncertainty remains about the impact of QE on market liquidity. Identifying the impact is particularly challenging due to the potential for reverse causality, because liquidity considerations might affect purchases. To address this challenge, we study the Bank of England’s Corporate Bond Purchase Scheme (CBPS), in which the Bank of England purchased £10 billion of sterling corporate bonds via a series of auctions over 2016 and 2017. In particular, we use granular offer-level data from the CBPS auctions to construct proxy measures for the Bank of England’s demand for bonds and auction participants’ supply of bonds, allowing us to control for any reverse causality from liquidity to purchases. Across a wide range of transaction-based liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.
This version was updated in July 2020. The Staff Working Paper was first published on 1 March 2019 under the title ‘The impact of QE on liquidity: evidence from the UK Corporate Bond Purchase Scheme’.