A Regression Discontinuity Design for Ordinal Running Variables: Evaluating Central Bank Purchases of Corporate Bonds

TL;DR

This paper develops a novel regression discontinuity approach for ordinal running variables to evaluate policy effects, demonstrated by analyzing the European Central Bank's corporate bond purchase program.

Contribution

It introduces a method for RD with ordinal running variables using an ordered probit model and local randomization, enabling causal inference in new contexts.

Findings

CSPP significantly reduces corporate bond spreads at issuance.

The proposed method effectively estimates causal effects with ordinal thresholds.

Application demonstrates the method's practical utility in policy evaluation.

Abstract

Regression discontinuity (RD) is a widely used quasi-experimental design for causal inference. In the standard RD, the assignment to treatment is determined by a continuous pretreatment variable (i.e., running variable) falling above or below a pre-fixed threshold. In the case of the corporate sector purchase programme (CSPP) of the European Central Bank, which involves large-scale purchases of securities issued by corporations in the euro area, such a threshold can be defined in terms of an ordinal running variable. This feature poses challenges to RD estimation due to the lack of a meaningful measure of distance. To evaluate such program, this paper proposes an RD approach for ordinal running variables under the local randomization framework. The proposal first estimates an ordered probit model for the ordinal running variable. The estimated probability of being assigned to treatment is then adopted as a latent continuous running variable and used to identify a covariate-balanced subsample around the threshold. Assuming local unconfoundedness of the treatment in the subsample, an estimate of the effect of the program is obtained by employing a weighted estimator of the average treatment effect. Two weighting estimators---overlap weights and ATT weights---as well as their augmented versions are considered. We apply the method to evaluate the causal effect of the CSPP and find a statistically significant and negative effect on corporate bond spreads at issuance.