What are the "Asset Purchases"?

In recent events, asset purchases usually pertain to purchasing government bonds to lower interest rates, inject capital into the economy, or both. It is an unconventional monetary policy used by a central bank to stimulate the economy, otherwise known as quantitative easing.

To stabilize financial markets and support activity in response to the COVID-19 pandemic, many central banks have employed asset purchase programs—in the case of several emerging markets and developing economies (EMDEs), for the first time. Although these programs appear to have initially helped lower government bond yields, their broader macroeconomic consequences have yet to be seen. The programs present risks if they are perceived to be financing unsustainable fiscal deficits or expanded in the absence of the uniquely accommodative macroeconomic policies enacted by advanced economies.

A diverse set of program designs

In 2020, central banks in 18 EMDEs announced or implemented asset purchase programs focused on local currency government bonds. The size of purchases varied from less than 1% to 6% of GDP, significantly smaller than the programs launched in advanced economies. In some cases, however, asset purchases continue to grow. Many EMDE central banks have not announced the scale or duration of purchases. While most have been purchasing only in secondary markets, some have purchased bonds directly from governments with the objective of financing rising fiscal deficits.

The decline in long-term bond yields

Announcements of asset purchase programs appear to have helped stabilize bond markets and boost equity prices while avoiding putting pressure on currencies. On average, the effects on long-term bond yields and equity prices have been greater than the effects of announcements of monetary policy rate cuts in response to COVID-19. In addition, the announcement effect of EMDE asset purchases on government bond yields appears to have been larger than the announcement effects of advanced-economy asset purchases. The broader macroeconomic implications, however, remain to be seen.