Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program

Tinbergen Institute Discussion Paper 17080/IV (2017)

28 Pages Posted: 13 Sep 2017

See all articles by Martijn Dröes

Martijn Dröes

University of Amsterdam

Ryan Lamoen

De Nederlandsche Bank

Simona Mattheussens

De Nederlandsche Bank

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2017

Abstract

This paper examines whether the ECB’s Quantitative Easing (QE) policy is causing government bond prices to deviate from their fundamental value. We use a recent advance in the methodology to measure exuberant price behavior in financial time series introduced by Phillips et al. (2015). We extend this methodology and apply it to government bond prices. The results show that the QE policy substantially inflated government bond prices in Euro Area countries to such an extent that bond prices are no longer in line with the underlying fundamental value. We argue that careful monitoring is required when the QE policy is eventually reversed. The test procedure outlined in this paper provides a monitoring tool to do so.

Keywords: government bond yields, asset price bubbles, monetary policy

JEL Classification: G12, G15, E52

Suggested Citation

Dröes, Martijn and Lamoen, Ryan and Mattheussens, Simona, Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program (August 25, 2017). Tinbergen Institute Discussion Paper 17080/IV (2017), Available at SSRN: https://ssrn.com/abstract=3035371 or http://dx.doi.org/10.2139/ssrn.3035371

Martijn Dröes (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Ryan Lamoen

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Simona Mattheussens

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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