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Monetary Policy and Money Market Funds

Author

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  • Bua, Giovanna

    (Central Bank of Ireland)

  • Dunne, Peter G.

    (Central Bank of Ireland)

Abstract

We explore how recent unconventional monetary policies have affected money market fund behaviour. This category of investment funds is important from a monetary policy perspective because its members provide investment opportunities that are expected to be safe and highly liquid while they are actively involved in short term interbank funding markets. Crucially, they do not have access to the ECB’s deposit facility. At its extreme, unconventional monetary policy puts money market funds under pressure by depressing the yields available on the assets they typically hold. This could cause excessive risk taking by funds, outflows of investment and unintended intermediation between banks and funds.We consider whether these concerns are well-grounded and reveal other unintended side-effects.

Suggested Citation

  • Bua, Giovanna & Dunne, Peter G., 2019. "Monetary Policy and Money Market Funds," Economic Letters 9/EL/19, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:9/el/19
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    References listed on IDEAS

    as
    1. Dimitri Vayanos & Jean‐Luc Vila, 2021. "A Preferred‐Habitat Model of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 89(1), pages 77-112, January.
    2. Bua, Giovanna & Dunne, Peter G. & Sorbo, Jacopo, 2019. "Money Market Funds and Unconventional Monetary Policy," Research Technical Papers 7/RT/19, Central Bank of Ireland.
    3. Robin Greenwood & Dimitri Vayanos, 2010. "Price Pressure in the Government Bond Market," American Economic Review, American Economic Association, vol. 100(2), pages 585-590, May.
    4. Di Maggio, Marco & Kacperczyk, Marcin, 2017. "The unintended consequences of the zero lower bound policy," Journal of Financial Economics, Elsevier, vol. 123(1), pages 59-80.
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    Cited by:

    1. Fricke, Daniel & Greppmair, Stefan & Paludkiewicz, Karol, 2022. "You can't always get what you want (where you want it): Cross-border effects of the US money market fund reform," Discussion Papers 03/2022, Deutsche Bundesbank.
    2. Jeffrey R. Campbell & Thomas B. King & Anna Orlik & Rebecca Zarutskie, 2020. "Issues Regarding the Use of the Policy Rate Tool," Finance and Economics Discussion Series 2020-070, Board of Governors of the Federal Reserve System (U.S.).

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