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Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility

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Abstract

In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from substitution out of private repo. However, we also demonstrate that cash lenders, when investing in the ONRRP, do not cease trading with any of their dealer counterparties, highlighting the importance of lending relationships in the repo market. Lastly, using a confidential data set of repo transactions, we find that the presence of the Fed as a borrower in the repo market increases the bargaining power of cash lenders, who are able to command higher rates in their remaining private repo transactions.

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  • Alyssa G. Anderson & John Kandrac, 2016. "Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility," Finance and Economics Discussion Series 2016-096, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2016-96
    DOI: 10.17016/FEDS.2016.096
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    File URL: https://www.federalreserve.gov/econresdata/feds/2016/files/2016096pap.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sriya Anbil & Zeynep Senyuz, 2018. "The Regulatory and Monetary Policy Nexus in the Repo Market," Finance and Economics Discussion Series 2018-027, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Repo; Money market mutual funds; Monetary policy; Federal Reserve;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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