IDEAS home Printed from https://ideas.repec.org/p/bge/wpaper/1206.html
   My bibliography  Save this paper

Liquidity Risk, Market Power and the Informational Effects of Policy

Author

Listed:
  • Grégory Claeys
  • Chara Papioti
  • Andreas Tryphonides

Abstract

. Using a structural approach, we combine bidding data from open market operations as well as macroeconomic information to recover the latent distribution of liquidity risk across financial institutions in Chile and how it is affected by policy. We find that unanticipated shocks to foreign reserve accumulation and interest rates have significant effects on aggregate beliefs about a liquidity shock in the near future. We demonstrate that accounting for market power is important for measuring the strength of this informational channel of macroeconomic policy.

Suggested Citation

  • Grégory Claeys & Chara Papioti & Andreas Tryphonides, 2020. "Liquidity Risk, Market Power and the Informational Effects of Policy," Working Papers 1206, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1206
    as

    Download full text from publisher

    File URL: https://bse.eu/sites/default/files/working_paper_pdfs/1206_0.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Maggiori, Matteo, 2021. "International Macroeconomics With Imperfect Financial Markets," SocArXiv z8g6r, Center for Open Science.
    2. Reis, Ricardo, 2015. "Comment on: “when does a central bank’s balance sheet require fiscal support?” by Marco Del Negro and Christopher A. Sims," LSE Research Online Documents on Economics 65867, London School of Economics and Political Science, LSE Library.
    3. Jakub Kastl, 2011. "Discrete Bids and Empirical Inference in Divisible Good Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(3), pages 974-1014.
    4. Luigi Bocola & Guido Lorenzoni, 2017. "Financial Crises and Lending of Last Resort in Open Economies," Staff Report 557, Federal Reserve Bank of Minneapolis.
    5. Ali Hortaçsu & Jakub Kastl, 2012. "Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions," Econometrica, Econometric Society, vol. 80(6), pages 2511-2542, November.
    6. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    7. Lawrence M. Ausubel & Peter Cramton, 2004. "Auctioning Many Divisible Goods," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 480-493, 04/05.
    8. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
    9. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    10. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
    11. Sebastián Fanelli & Ludwig Straub, 2021. "A Theory of Foreign Exchange Interventions [The Cost of Foreign Exchange Intervention: Concepts and Measurement]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 2857-2885.
    12. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
    13. Xavier Freixas & Antoine Martin & David Skeie, 2011. "Bank Liquidity, Interbank Markets, and Monetary Policy," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2656-2692.
    14. Bengui, Julien & Arce, Fernando & Bianchi, Javier, 2019. "A Macroprudential Theory of Foreign Reserve Accumulation," CEPR Discussion Papers 13952, C.E.P.R. Discussion Papers.
    15. Nuno Cassola & Ali Hortaçsu & Jakub Kastl, 2013. "The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short‐Term Funds," Econometrica, Econometric Society, vol. 81(4), pages 1309-1345, July.
    16. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
    17. Javier Bianchi & Guido Lorenzoni, 2021. "The Prudential Use of Capital Controls and Foreign Currency Reserves," Working Papers 787, Federal Reserve Bank of Minneapolis.
    18. Allen, Franklin & Carletti, Elena & Gale, Douglas, 2009. "Interbank market liquidity and central bank intervention," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 639-652, July.
    19. Xavier Gabaix & Matteo Maggiori, 2015. "International Liquidity and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(3), pages 1369-1420.
    20. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1366-1400.
    21. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not as Bad as You Think," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441, National Bureau of Economic Research, Inc.
    22. Luis F. Céspedes & Javier García-Cicco & Diego Saravia, 2014. "Monetary Policy at the Zero Lower Bound: The Chilean Experience," Central Banking, Analysis, and Economic Policies Book Series, in: Sofía Bauducco & Lawrence Christiano & Claudio Raddatz (ed.),Macroeconomic and Financial Stability: challenges for Monetary Policy, edition 1, volume 19, chapter 13, pages 427-460, Central Bank of Chile.
    23. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," Research Department Publications 4504, Inter-American Development Bank, Research Department.
    24. Leonardo Melosi, 2017. "Signalling Effects of Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 853-884.
    25. Koop, Gary & Korobilis, Dimitris, 2010. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," Foundations and Trends(R) in Econometrics, now publishers, vol. 3(4), pages 267-358, July.
    26. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    27. Ali Hortaçsu & David McAdams, 2010. "Mechanism Choice and Strategic Bidding in Divisible Good Auctions: An Empirical Analysis of the Turkish Treasury Auction Market," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 833-865.
    28. Javier Bianchi & Saki Bigio, 2022. "Banks, Liquidity Management, and Monetary Policy," Econometrica, Econometric Society, vol. 90(1), pages 391-454, January.
    29. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-1369, December.
    30. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December.
    31. Sebastián Becerra & Gregory Claeys & Juan Francisco Martínez, 2016. "A new liquidity risk measure for the Chilean banking sector," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 19(3), pages 026-067, December.
    32. Marek Jarociński & Peter Karadi, 2020. "Deconstructing Monetary Policy Surprises—The Role of Information Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 1-43, April.
    33. Emi Nakamura & Jón Steinsson, 2018. "High-Frequency Identification of Monetary Non-Neutrality: The Information Effect," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(3), pages 1283-1330.
    34. Paolo Cavallino, 2019. "Capital Flows and Foreign Exchange Intervention," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(2), pages 127-170, April.
    35. Du, Wenxin & Im, Joanne & Schreger, Jesse, 2018. "The U.S. Treasury Premium," Journal of International Economics, Elsevier, vol. 112(C), pages 167-181.
    36. Luigi Bocola & Guido Lorenzoni, 2020. "Financial Crises, Dollarization, and Lending of Last Resort in Open Economies," American Economic Review, American Economic Association, vol. 110(8), pages 2524-2557, August.
    37. Dean Corbae & Pablo D'Erasmo, 2021. "Capital Buffers in a Quantitative Model of Banking Industry Dynamics," Econometrica, Econometric Society, vol. 89(6), pages 2975-3023, November.
    38. Ilan Kremer, 2004. "Underpricing and Market Power in Uniform Price Auctions," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 849-877.
    39. Vitale, Paolo, 2003. "Foreign exchange intervention: how to signal policy objectives and stabilise the economy," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 841-870, May.
    40. Luis Cabezas & José Gregorio, 2019. "Accumulation of reserves in emerging and developing countries: mercantilism versus insurance," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 155(4), pages 819-857, November.
    41. Kastl, Jakub, 2012. "On the properties of equilibria in private value divisible good auctions with constrained bidding," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 339-352.
    42. Carolin Pflueger & Emil Siriwardane & Adi Sunderam, 2020. "Financial Market Risk Perceptions and the Macroeconomy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1443-1491.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jason Allen & Milena Wittwer, 2023. "Intermediary Market Power and Capital Constraints," Staff Working Papers 23-51, Bank of Canada.
    2. Cezar, Rafael & Monnet, Eric, 2023. "Capital controls and foreign reserves against external shocks: Combined or alone?," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. Pär Holmberg, 2017. "Pro‐competitive Rationing in Multi‐unit Auctions," Economic Journal, Royal Economic Society, vol. 127(605), pages 372-395, October.
    4. Jason Allen & Jakub Kastl & Milena Wittwer, 2020. "Maturity Composition and the Demand for Government Debt," Staff Working Papers 20-29, Bank of Canada.
    5. Javier Bianchi & Guido Lorenzoni, 2021. "The Prudential Use of Capital Controls and Foreign Currency Reserves," Working Papers 787, Federal Reserve Bank of Minneapolis.
    6. Anderson, Edward & Holmberg, Pär, 2018. "Price instability in multi-unit auctions," Journal of Economic Theory, Elsevier, vol. 175(C), pages 318-341.
    7. Davis, J. Scott & Devereux, Michael B. & Yu, Changhua, 2023. "Sudden stops and optimal foreign exchange intervention," Journal of International Economics, Elsevier, vol. 141(C).
    8. Matteo Maggiori, 2021. "FX policy when financial markets are imperfect," BIS Working Papers 942, Bank for International Settlements.
    9. Pierre Olivier Gourinchas, 2023. "International Macroeconomics: From the Great Financial Crisis to COVID-19, and Beyond," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(1), pages 1-34, March.
    10. Kastl, Jakub, 2020. "Auctions in financial markets," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    11. Manzano, Carolina & Vives, Xavier, 2021. "Market power and welfare in asymmetric divisible good auctions," Theoretical Economics, Econometric Society, vol. 16(3), July.
    12. Fernando Arce & Julien Bengui & Javier Bianchi, 2019. "A Macroprudential Theory of Foreign Reserve Accumulation," NBER Working Papers 26236, National Bureau of Economic Research, Inc.
    13. Lukas Menkhoff & Malte Rieth & Tobias Stohr, 2021. "The Dynamic Impact of FX Interventions on Financial Markets," The Review of Economics and Statistics, MIT Press, vol. 103(5), pages 939-953, December.
    14. Song, Zhaogang & Zhu, Haoxiang, 2018. "Quantitative easing auctions of Treasury bonds," Journal of Financial Economics, Elsevier, vol. 128(1), pages 103-124.
    15. Jason Allen & Jakub Kastl & Milena Wittwer, 2020. "Primary Dealers and the Demand for Government Debt," Working Papers 2020-27, Princeton University. Economics Department..
    16. Hoek, Jasper & Kamin, Steve & Yoldas, Emre, 2022. "Are higher U.S. interest rates always bad news for emerging markets?," Journal of International Economics, Elsevier, vol. 137(C).
    17. Garcia-Cicco Javier & Bucacos Elizabeth & Mello Miguel, 2023. "Foreign Exchange Interventions and Foreign Shocks: The case of Uruguay," Asociación Argentina de Economía Política: Working Papers 4657, Asociación Argentina de Economía Política.
    18. Helmut Elsinger & Philipp Schmidt-Dengler & Christine Zulehner, 2019. "Competition in Treasury Auctions," American Economic Journal: Microeconomics, American Economic Association, vol. 11(1), pages 157-184, February.
    19. Cavallino, Paolo & Sandri, Damiano, 2023. "The open-economy ELB: Contractionary monetary easing and the trilemma," Journal of International Economics, Elsevier, vol. 140(C).
    20. Elizabeth Bucacos & Javier García-Cicco & Miguel Mello, 2023. "Foreign Exchange Interventions and Foreign Shocks. The case of Uruguay," Documentos de trabajo 2023008, Banco Central del Uruguay.

    More about this item

    Keywords

    multi-unit auction; liquidity risk; signalling effects of macroeconomic policy;
    All these keywords.

    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F30 - International Economics - - International Finance - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:1206. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bruno Guallar (email available below). General contact details of provider: https://edirc.repec.org/data/bargses.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.