Bank of England staff working paper finds 1980s overfunding raised long yields but lowered short rates with limited macro effects

The Bank of England has published Staff Working Paper No. 1,183 by David Ronicle, which examines the Bank’s early-1980s overfunding policy as a historical analogue for quantitative tightening. The paper presents what it describes as the first in-depth empirical assessment of that policy and finds that excess gilt issuance beyond fiscal financing needs had offsetting effects on asset prices. Long-term yields rose through a portfolio balance channel, while short-term rates fell, potentially through signalling effects, leaving only limited effects on inflation and monetary aggregates. The paper is published as research in progress and does not represent Bank of England policy. Overfunding was used in the early 1980s as an active monetary policy tool to slow money growth. Using high-frequency gilt issuance announcements and an external instrument derived from segmentation in the money market, the paper finds that overfunding shocks widened the yield curve and compressed corporate spreads. It also concludes that the portfolio balance effects worked mainly through duration risk rather than local supply effects. On that basis, the paper argues that modern frameworks for analysing balance sheet policies are applicable to this historical episode and that the different channels of quantitative tightening can be used to calibrate the overall effects of balance sheet unwind.