Quantitative easing effects on commercial bank liability and government yields in UK: A threshold cointegration approach

During the recent financial crisis, the Bank of England has taken quantitative easing (QE) measures by buying public as well as private assets in order to strengthen the economy via liquidity injections. This paper investigates the dynamic relationship between unconventional policy measures reflected in central bank’s assets, and government versus commercial bank liability curves in a non-linear framework. By adopting a threshold cointegration methodology we provide evidence against linearity in gilt and commercial banks’ yield responses to asset purchase facility (APF) activity with policy rate being near the zero lower bound (ZLB). By estimating a momentum-TART model, evidence for a uni-directional long run causality from the Bank of England’s assets to both curves are present. © 2017, Springer-Verlag GmbH Germany, part of Springer Nature