The Rebalancing Channel of QE : New Evidence at the Security Level in the Euro Area

This paper examines portfolio rebalancing at the security level during the ECB’s Asset Purchase Programme (APP). Search for yield via portfolio rebalancing is one of the possible channels through which Quantitative Easing (QE) may affect real economic activity. This paper shows that during QE, European investors significantly increased their relative holdings of debt denominated in emerging market currencies. In addition, a significant rebalancing has taken place within the euro area, as investors increased their relative holdings of debt issued by vulnerable European countries. This increase has been driven by investors located in peripheral countries, while investors in other countries were net sellers. QE thus has a heterogeneous impact on security holdings across euro area countries and sectors. These findings are relevant for policymakers to assess the (side-)effects of QE and the potential impact of monetary tightening