Presentation "Asset purchases: from crisis to recovery" by Isabel Schnabel, Latvijas Banka's conference 20.09.2021

1. Asset purchases:
from crisis to recovery
Isabel Schnabel, Member of the ECB’s Executive Board
Annual Conference of Latvijas Banka, Frankfurt am Main, 20 September 2021

2. Rubric
www.ecb.europa.eu ©
0.0
0.2
0.4
0.6
0.8
1.0
Jan-99 Jan-03 Jan-07 Jan-11 Jan-15 Jan-19
Euro area (changing composition) United States
0.0
0.2
0.4
0.6
0.8
1.0
0.0
0.2
0.4
0.6
0.8
1.0
Jan-20 Jul-20 Jan-21 Jul-21
PEPP has likely prevented a severe financial crisis
Composite Indicator of Systemic Stress
(index)
Source: SDW.
Latest observation: 14 September 2021.
2
PEPP announcement

3. Rubric
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Asset purchases were particularly effective in periods of market stress
PSPP and PEPP yield elasticities
to sovereign bond purchases
(bps per 500 bn of sovereign bond purchases in the euro area)
Source: ECB calculations.
Notes: PSPP elasticities are based on Eser et al. (2019) informed by the March PEPP envelope. PEPP
elasticities are derived from a recalibrated version of Eser et al. (2019) so that the model-implied yield
reactions to the March PEPP announcement match two-day yield changes observed after 18 March.
Elasticities refer to GDP-weighted zero-coupon yields of the four largest euro area jurisdictions (i.e.
Germany, Spain, France and Italy) in response to €500 billion of sovereign bond purchases in the euro
area. No reinvestment assumed.
“Flow effects” on daily bond returns
(impact of 1 pp increase in purchases of security relative to its
outstanding amount, in %)
3
0
5
10
15
20
25
30
1y 2y 3y 4y 5y 6y 7y 8y 9y 10y
PSPP elasticities PEPP elasticities
-1
0
1
2
3
4
5
All
countries
non-stressed
period
Stressed
countries
non-stressed
period
Stressed
countries
stressed
period
Coefficient
Source: ECB calculations.
Notes: The impact estimates derive from regressions of daily bond returns of individual central
government securities on ECB purchases of these securities, scaled by their outstanding amounts, and a
full set of security and day-fixed effects. Purchase volumes are instrumented via the blackout periods
embedded in the PSPP and PEPP design, as detailed in De Santis and Holm-Hadulla (2020. The blue
diamonds are point estimates and the whiskers are 95% confidence intervals.

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Flexibility is important for market stabilisation function of PEPP
Net PEPP asset purchases
(EUR bn)
Source: ECB website.
Latest observation: July 2021
Source: ECB website, ECB calculations.
Notes: Capital key deviations for public sector purchases calculated in bi-monthly stock terms.
Latest observation: July 2021.
Cumulated deviations from ECB capital key for
public sector assets under the PEPP
(percentage point)
4
-50
0
50
100
150
200
250
Mar-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Public Sector Commercial Paper Other Private Sector
-8
-6
-4
-2
0
2
4
6
8
Mar-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
DE ES FR IT other jurisdictions

5. Rubric
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0
20
40
60
80
0
20
40
60
80
5y 6y 7y 8y 9y 10y
Range of models Median of models
Asset purchases succeeded in ensuring favourable financing conditions
Impact of COVID-19-induced debt-to-GDP
revisions on euro area spot sovereign yields
(basis points)
Source: ECB.
Notes: The COVID-19-induced revisions in debt-to-GDP projections of the GDP-weighted Big4 euro area,
as measured by the increase from March 2020 to June 2021 BMPE projections, are mapped into Big4 yield
impacts via an estimated debt-yield relationship based on the median of three models and their variants.
The models include reduced-form regressions as in Laubach (2009), a VAR and a term-structure model
based on Dewachter et al. (2015). In the former two model approaches, spot curve impacts are derived
from forward curve impacts via polynomial fitting.
Sources: ECB.
Notes: The free-float measure for the four largest euro area economies (Germany, France, Italy and
Spain) is defined as holdings of general government bonds by price-sensitive private-sector investors as
a share of total outstanding bond supply, both expressed in ten-year maturity equivalents. Price sensitive
investors are defined as all sectors other than the foreign official sector, insurance companies and
pension funds, and the Eurosystem. The euro area government bond yield is a GDP-weighted average
of 10-year benchmark bond yields. Latest observation: March 2021 (quarterly data).
Free-floating EA-4 bond supply and
10-year EA GDP-weighted sovereign yield
(percent)
5
-1.00
-0.20
0.60
1.40
2.20
3.00
30
35
40
45
50
55
2014 2016 2018 2020
Free-float EA Big 4 countries
10y EA gov't bond yield
Start of PSPP
Start of
PEPP

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0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Oct-14 Dec-15 Feb-17 Apr-18 Jun-19 Aug-20
PSPP CSPP CBPP3 ABSPP PEPP
Stock of acquired assets will continue to have persistent effects on yields
APP and PEPP holdings
(EUR bn)
Source: ECB website, ECB calculations.
Latest observation: 31 August 2021.
6
Sources: ECB calculations.
Notes: Impacts derived from the model of Eser et al. (2019) and a recalibrated version of the model so that the model-
implied yield reactions to the March PEPP announcement match the two-day yield changes observed after 18 March
(average estimates). Results refer to GDP-weighted averages of the zero-coupon yields of the big-four sovereign issuers
(DE, FR, IT, ES). Future assumptions are based on results from the ECB’s survey of monetary analysts, i.e. APP (PEPP)
end of net purchases: June 2024 (March 2022); APP (PEPP) end of reinvestments: June 2026 (December 2024).
Latest observation: March 2021 for past estimates.
Estimates of impact of APP and PEPP
holdings on EA-4 sovereign term premia
(basis points)
-200
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
2015 2017 2019 2021 2023 2025
2y 5y 10y
COVID-19
outbreak

7. Rubric
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-1
0
1
2
3
4
0 1 2 3 4
2010-Feb 2020 (ex. 2012-13)
March 2020-today
Last obs (15-Sep-21)
-1
0
1
2
3
4
0 1 2 3 4
2010-Feb 2020
March 2020-today
Last obs (15-Sep-21)
Market participants are expecting monetary policy to be more patient
US 1y forward OIS and
inflation swap rates in 3 years time
(percentage)
Euro area 1y forward OIS and
inflation swap rates in 3 years time
(percentage)
Source: Bloomberg, ECB calculations
Latest observation: 15 September 2021.
Source: Bloomberg, ECB calculations
Latest observation: 15 September 2021.
7
1y
EONIA
swap
in
3y
(%)
1y inflation swap in 3y (%)
1y inflation swap in 3y (%)
1y
USD
OIS
in
3y
(%)

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Markets price risks of higher inflation but inflation outlook remains subdued
8
Inflation risk premium and probability of
inflation exceeding 2% over the next five years
(percent per annum, percentage)
Sources: Refinitiv, Bloomberg and ECB calculations.
Notes: Inflation risk premium estimates are based on affine term structure models following Joslin,
Singleton and Zhu (2011) applied to ILS rates adjusted for the indexation lag as in Camba-Mendez and
Werner (2017). Probabilities implied by five-year zero-coupon inflation options, smoothed over five
business days. Risk-neutral probabilities may differ significantly from physical, or true, probabilities.
Latest observation: August 2021 (monthly data).
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
18Q1 19Q1 20Q1 21Q1 22Q1 23Q1
Eurosystem September 2021 HICP projections
(annual percentage change)
Start projection horizon
Source: ECB.
-100
-80
-60
-40
-20
0
20
40
60
80
100
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2010 2013 2016 2019
Inflation risk premium
Probability of inflation exceeding 2% (rhs)

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