Quantitative Tightening Around the Globe: What Have We Learned?

Drawing on the recent experience of seven advanced-economy central banks (Australia, Canada, the euro area, New Zealand, Sweden, the UK and the US), this paper offers the first cross-country assessment of quantitative tightening (QT) — the unwinding of bond holdings accumulated under quantitative easing. In an event study that pools QT announcements across countries and over time while controlling for policy-rate surprises and economic data surprises, the authors estimate that a QT announcement corresponds to a small but significant increase of about 4–8 basis points in government bond yields at horizons of one year and longer, with an effect of about zero at three months; aggregating announcements by country over 2021–2023 gives cumulative increases in yields averaging roughly 20–26 bps, with substantial heterogeneity across countries — from no impact up to about 69 bps for the UK. These effects are larger for “Main Announcements” carrying concrete program details, for active bond sales than for passive run-off, and when the program involves government bonds; estimated effects on equity indices, exchange rates, financial conditions indices and inflation compensation point in the direction of tighter financial conditions but are usually statistically insignificant, the noteworthy exceptions being a significant decline in corporate bond indices and in the government bond “convenience yield.” Implementing QT shows no significant pricing effect for government bonds on the narrow implementation dates — including no difference between securities actively sold and comparable securities not sold on the same date — but over time is consistent with a significant reduction in banking-system liquidity balances, a modest rise in overnight funding spreads, and a decline in the convenience yield, while the authors find no evidence that QT has directly worsened government bond market liquidity or weakened auction demand. As central banks stepped back, domestic nonbank investors absorbed an important share of the shift — in the US, the “households” category (which includes hedge funds) has been a particularly important replacement for the Fed’s unwind. The authors explicitly caution against a causal interpretation and stress that almost all these episodes occurred during the unusual post-pandemic recovery alongside aggressive rate hikes, rest on limited observations, and may understate the true impact; on their reading QT has had more of an impact than watching “paint dry,” but far less than simply reversing the effects of QE programs launched during periods of market stress.

Matthew Luzzetti | Macro Paper Warehouse

Quantitative Tightening Around the Globe: What Have We Learned?