Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 402: The Liquidity of the Government Bond Market – What Impact Does Quantitative Easing Have? Evidence from Sweden

Marianna Blix Grimaldi (), Alberto Crosta () and Dong Zhang ()
Additional contact information
Marianna Blix Grimaldi: Swedish National Debt Office
Alberto Crosta: Swedish Financial Supervisory Authority

Abstract: We consider the effects of quantitative easing on the liquidity of the Swedish government bonds. To capture multiple dimensions of liquidity we use several measures built on a unique and highly granular transaction-based dataset. We find that the Riksbank’s purchases of government bonds improved liquidity, but only to a point. In fact, the deterioration in the level of market liquidity from quantitative easing via the scarcity effect is significantly larger than the improvement from the demand effect. We find that such effects are nonlinear; they tend to be amplified when the share of the central bank holdings is larger than a threshold (40 percent).

Keywords: Market Liquidity; Government Bond Market; Quantitative Easing; Public Debt Management

JEL-codes: E52; E58; G12

Language: English

46 pages, May 1, 2021

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