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

46 Pages Posted: 19 Dec 2016

See all articles by Alyssa G. Anderson

Alyssa G. Anderson

Board of Governors of the Federal Reserve System

John Kandrac

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-10-31

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.

Keywords: Repo, Money market mutual funds, Monetary policy, Federal Reserve

JEL Classification: G23, E52, G11, E58

Suggested Citation

Anderson, Alyssa G. and Kandrac, John, Monetary Policy Implementation and Private Repo Displacement: Evidence from the Overnight Reverse Repurchase Facility (2016-10-31). FEDS Working Paper No. 2016-096, Available at SSRN: https://ssrn.com/abstract=2887000 or http://dx.doi.org/10.17016/FEDS.2016.096

Alyssa G. Anderson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

John Kandrac

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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