New Bank of England research adds further weight to the view that central bank asset purchases (‘quantitative easing’ or QE) can affect government and corporate bond yields. In particular, the study, which is published in the May 2014 issue of the Economic Journal, finds evidence that QE works by reducing the supply of government bonds remaining in the private sector – what are known as ‘local supply effects’.

These local supply effects seem to be important: according to the researchers’ estimates, a £75 billion increase in asset purchases by the Bank of England through this channel would reduce government bond yields by around 0.25 percentage points in the UK (around half of the total impact of QE on government bond yields in the events examined).

Importantly, the study finds that this channel operated during both the initial period of purchases in 2009 and after purchases had restarted in 2012. So the strength of this channel of QE does not appear to have diminished over time.