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Safe Asset Scarcity and Monetary Policy Transmission

Author

Listed:
  • Benoit Nguyen
  • Davide Tomio
  • Miklos Vari

Abstract

Most central banks exited their decade-long accommodative monetary policy cycle by first raising rates, rather than starting by reducing their balance sheet. We show that the scarcity of government bonds---which were purchased under QE and held by the Eurosystem---reduces the transmission of rate hikes to money market rates. In July 2022, when the ECB increased its policy rates by 50bp for the first time in a decade, rates of repo transactions collateralized by the scarcest bonds increased by only 35bp. We show that this imperfect pass-through to repo rates is priced in treasury yields. Heterogeneous bond holdings across institutions imply that collateralized funding costs vary significantly across European institutions.

Suggested Citation

  • Benoit Nguyen & Davide Tomio & Miklos Vari, 2023. "Safe Asset Scarcity and Monetary Policy Transmission," Working papers 934, Banque de France.
    • Handle: RePEc:bfr:banfra:934
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Natural Disasters; Extreme Weather; Inflation; Disaggregate Inflation; Inequality; Price Gouging;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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