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The Role of Ambiguity in the Monetary Policy Transmissions: Evidence from the European Repo Market

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  • Natalie Kessler
  • Poramapa Poonpakdee

Abstract

We develop a method to measure ambiguity—uncertainty about the distribution of out-comes—in asset markets, using the volatility of the empirical distribution of unpredictable components in transaction prices. For comparison, we measure risk as the volatility of the unpredictable price component itself, following the conventional practice of using the cross-sectional standard deviation. Applying this framework to 22 million secured lending transactions in the EU, we estimate ambiguity and risk perceived by major money market lenders. Unexpected monetary policy tightening raises both measures. Higher ambiguity reduces repo market liquidity by lowering loan volumes and increasing repo rates, thereby amplifying contractionary effects. Higher risk lowers loan volumes but also repo rates, partly dampening contractionary effects. Our results suggest that ambiguity plays a distinct and quantitatively important role in monetary policy transmission that is overlooked when fo-cusing on risk alone.

Suggested Citation

  • Natalie Kessler & Poramapa Poonpakdee, 2025. "The Role of Ambiguity in the Monetary Policy Transmissions: Evidence from the European Repo Market," Working Papers 847, DNB.
    • Handle: RePEc:dnb:dnbwpp:847
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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