September 2018 issue contents
The Effects of Government Bond Purchases on Leverage Constraints of Banks and Non-Financial Firms

by Michael Kühl
Deutsche Bundesbank


This paper investigates how government bond purchases affect leverage-constrained banks and non-financial firms by utilizing a stochastic general equilibrium model. My results indicate that government bond purchases not only reduce nonfinancial firms' borrowing costs, amplified through a reduction in expected defaults, but also lower banks' profit margins. In an economy in which loans priced at par dominate in banks' balance sheets-as a reflection of the euro area's structure-the leverage constraint of non-financial firms is relaxed while that of banks tightens. I show that the leverage constraint in the non-financial sector plays an essential role in transmitting the impulses of government bond purchases to the real economy. In a bank-financed economy, this channel mainly controls the positive impulse on output and inflation following from government bond purchases, although the soundness of the financial sector deteriorates. This paper adds a new perspective to the discussion regarding the efficacy of government bond purchases as a policy tool.

JEL Code: E44, E58, E61.

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