| Abstract: |
We examine how the Bank of England’s quantitative easing (QE) policy during
the global financial crisis affected the investment behaviour of insurance
companies and pension funds and whether their behaviour was consistent with
the operation of the so-called 'portfolio balance channel' that has been
emphasised by UK and US monetary policy makers as a key channel through which
QE works. To assess the incremental impact of QE, we need some counterfactual
of how the investment behaviour of institutional investors would have changed
in the absence of the policy. We construct this by conditioning on variables
that explain portfolio allocation but are invariant to the QE policy itself,
which allows us to construct both ex-ante and ex-post counterfactuals. Our
analysis of a range of data sources, including national accounts net
investment data and micro-data on life insurance companies and pension funds,
suggests QE led to institutional investors shifting their portfolios away from
gilts towards corporate bonds relative to the counterfactual. Although
analysis of the micro-data does suggest some heterogeneity in the response to
QE across different institutions, the shift into corporate bonds was quite
widespread. However, portfolio rebalancing by institutional investors into
riskier assets seems to have been limited to corporate bonds and did not
extend to equities. |