The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area

46 Pages Posted: 14 Jan 2019

See all articles by William Arrata

William Arrata

Banque de France

Benoît Nguyen

Banque de France

Imene Rahmouni-Rousseau

Banque de France

Miklos Vari

International Monetary Fund (IMF)

Date Written: December 2018

Abstract

Most short-term interest rates in the Euro area are below the European Central Bank deposit facility rate, the rate at which the central bank remunerates banks' excess reserves. This unexpected development coincided with the start of the Public Sector Purchase Program (PSPP). In this paper, we explore empirically the interactions between the PSPP and repo rates. We document different channels through which asset purchases may affect them. Using proprietary data from PSPP purchases and repo transactions for specific ('special') securities, we assess the scarcity channel of PSPP and its impact on repo rates. We estimate that purchasing 1 percent of a bond outstanding is associated with a decline of its repo rate of 0.78 bps. Using an instrumental variable, we find that the full effect may be up to six times higher.

Keywords: Interest rates, Monetary policy, Money markets, Central banks and their policies, Central banks and their policies, Repurchase agreements, Assets, Specialness, repo market, asset purchases, money market, Monetary Policy (Targets, Instruments, and Effects), General

JEL Classification: E52, E58, G10

Suggested Citation

Arrata, William and Nguyen, Benoît and Rahmouni-Rousseau, Imene and Vari, Miklos, The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area (December 2018). IMF Working Paper No. 18/258, Available at SSRN: https://ssrn.com/abstract=3314591

William Arrata (Contact Author)

Banque de France ( email )

Paris
France

Benoît Nguyen

Banque de France ( email )

Paris
France

Imene Rahmouni-Rousseau

Banque de France ( email )

Paris
France

Miklos Vari

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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