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Frictions in scaling up central bank balance sheet policies: How Eurosystem asset purchases impact the repo market

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  • Carrera de Souza, Tomás
  • Hudepohl, Tom

Abstract

This paper examines the impact of the Eurosystem's increased footprint in financial markets, resulting from the response to the Covid-19 crisis, on repo rates. We exploit transaction-level data on the repo market and the Eurosystem's purchase programmes and find that both marginal purchases (flow effect) and aggregate holdings (stock effect) have a significant downward impact on repo rates. The stock effect is nonlinear, and amplified when the central bank's holdings are larger. Finally, we find that the Eurosystem's Securities Lending Facility alleviates this collateral scarcity, but it does not fully compensate for the downward pressure on rates created by purchases.

Suggested Citation

  • Carrera de Souza, Tomás & Hudepohl, Tom, 2024. "Frictions in scaling up central bank balance sheet policies: How Eurosystem asset purchases impact the repo market," Journal of Banking & Finance, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002285
    DOI: 10.1016/j.jbankfin.2023.107037
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    More about this item

    Keywords

    Asset purchases; Unconventional monetary policy; Money market; Repo market; Specialness;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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