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Quantitative easing, the repo market, and the term structure of interest rates

Author

Listed:
  • Jappelli, Ruggero
  • Pelizzon, Loriana
  • Subrahmanyam, Marti G.

Abstract

We develop a quantity-driven general equilibrium model that integrates the term structure of interest rates with the repurchase agreements (repo) market to shed light on the combined effects of quantitative easing (QE) on the bond and money markets. We characterize in closed form the endogenous dynamic interaction between bond prices and repo rates, and show (i) that repo specialness dampens the impact of any given quantity of asset purchases due to QE on the slope of the term structure and (ii) that bond scarcity resulting from QE increases repo specialness, thus strengthening the local supply channel of QE.

Suggested Citation

  • Jappelli, Ruggero & Pelizzon, Loriana & Subrahmanyam, Marti G., 2023. "Quantitative easing, the repo market, and the term structure of interest rates," SAFE Working Paper Series 395, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:395
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    More about this item

    Keywords

    Term Structure of Interest Rates; Repo Specialness; Money Market; Quantitative Easing;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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