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Exit Strategies and Trade Dynamics in Repo Markets

Author

Listed:
  • Aleksander Berentsen
  • Sébastien Philippe Kraenzlin
  • Benjamin Müller

Abstract

How can a central bank control interest rates in an environment with large excess reserves? In this paper, we develop a dynamic general equilibrium model of a secured money market and calibrate it to the Swiss franc repo market to study this question. The theoretical model allows us to identify the factors that determine demand and supply of central bank reserves, the money market rate and trading activity in the money market. In addition, we simulate various instruments that a central bank can use to exit from unconventional monetary policy. These instruments are assessed with respect to the central bank's ability to control the money market rate, their impact on the trading activity and the operational costs of an exit. All exit instruments allow central banks to attain an interest rate target. However, the trading activity differs significantly among the instruments and central bank bills and reverse repos are the most cost-effective.

Suggested Citation

  • Aleksander Berentsen & Sébastien Philippe Kraenzlin & Benjamin Müller, 2015. "Exit Strategies and Trade Dynamics in Repo Markets," Working Papers 2015-09, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2015-09
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    Citations

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    Cited by:

    1. Roc Armenter & Benjamin Lester, 2017. "Excess Reserves and Monetary Policy Implementation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 212-235, January.
    2. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    3. Grossmann-Wirth, V. & Vari, M., 2016. "Sortie de taux bas en situation d’excédent de liquidité : l’expérience de la Réserve fédérale américaine," Bulletin de la Banque de France, Banque de France, issue 206, pages 41-50.
    4. Fuhrer, Lucas Marc, 2018. "Liquidity in the repo market," Journal of International Money and Finance, Elsevier, vol. 84(C), pages 1-22.
    5. Fuhrer, Lucas Marc & Müller, Benjamin & Steiner, Luzian, 2017. "The Liquidity Coverage Ratio and security prices," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 292-311.
    6. Lukas Altermatt, 2019. "Bank lending, financial frictions, and inside money creation," ECON - Working Papers 325, Department of Economics - University of Zurich.
    7. Ronald Heijmans & Richard Heuver & Zion Gorgi, 2016. "How to monitor the exit from the Eurosystem's unconventional monetary policy: Is EONIA dead and gone?," DNB Working Papers 504, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    exit strategies; money market; repo; monetary policy; interest rates;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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