Research paper examines impact of ECB’s public sector asset purchase programme on holdings of Irish investment funds

A research paper by Giovanna Bua & Peter G. Dunne examines the portfolio rebalancing behaviour of a large sample of investment funds, domiciled and reporting in Ireland, before and during the Eurosystem’s Public Sector Purchase Programme (PSPP). The data set of the paper spans the quarters from Q1 2014 to Q3 2016.

The paper finds that:

• Funds most exposed to the purchase programme reduce their holdings of government bonds and significantly rebalance their portfolios towards bonds issued by non-euro area deposit taking corporations, but only after the scaling-up of the purchase scheme in March 2016. The redemption, issuance and activity evidence is consistent with a flight of investment away from PSPP holding funds.
• The results support the argument that the Asset Purchasing Programme contributes to an improvement in long term funding costs for the public and private sectors. However, there is strong evidence that a significant exchange rate channel is at work through rebalancing towards non-euro assets.
• Overall, the analysis provides support for the beneficial effects of the extended asset purchase programme although in economic terms the effects do not appear large and most of the evidence for such effects is to be found in the most recent phase of the programme.

The views presented in Research Technical Papers are those of the authors alone and do not necessarily represent the official views of the Central Bank of Ireland.

Research Technical Papers are published on the Central Bank’s website here.