Pledged Collateral Market's Role in Transmission to Short-Term Market Rates

22 Pages Posted: 14 Jun 2019

See all articles by Manmohan Singh

Manmohan Singh

International Monetary Fund (IMF)

Rohit Goel

International Monetary Fund (IMF)

Date Written: May 2019

Abstract

In global financial centers, short-term market rates are effectively determined in the pledged collateral market, where banks and other financial institutions exchange collateral (such as bonds and equities) for money. Furthermore, the use of long-dated securities as collateral for short tenors-or example, in securities-lending and repo markets, and prime brokerage funding-impacts the risk premia (or moneyness) along the yield curve. In this paper, we deploy a methodology to show that transactions using long dated collateral also affect short-term market rates. Our results suggest that the unwind of central bank balance sheets will likely strengthen the monetary policy transmission, as dealer balance-sheet space is now relatively less constrained, with a rebound in collateral reuse.

Keywords: Central banks, Bank liquidity, Central banking, Sovereign wealth funds, Banking systems, central banks balance sheet, monetary policy transmission, collateral velocity, premia, moneyness, collateral, bunds, repo

JEL Classification: G21, G28, F33, K22, G18, G15, E01, E52, D4, G12

Suggested Citation

Singh, Manmohan and Goel, Rohit, Pledged Collateral Market's Role in Transmission to Short-Term Market Rates (May 2019). IMF Working Paper No. 19/106, Available at SSRN: https://ssrn.com/abstract=3404062

Manmohan Singh (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Rohit Goel

International Monetary Fund (IMF) ( email )

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

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