The Collateral Channel of Monetary Policy: Evidence from China

60 Pages Posted: 6 Mar 2020 Last revised: 7 Mar 2022

See all articles by Hanming Fang

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Yongqin Wang

Fudan University

Xian Wu

University of Wisconsin - Madison

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2022


Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it difficult to empirically identify their causal effects on the financial market and the real economy. We exploit a quasi-natural experiment in China, where dual-listed bonds are traded in two mostly segmented markets: the interbank market regulated by the Central Bank, and the exchange market regulated by the securities regulator. During a policy shift in our study period, China's Central Bank included a class of previously ineligible bonds in the interbank market to become eligible collateral for financial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-difference strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We find that in the secondary market the policy reduced the spreads of the newly collateralizable bonds in the treatment market (the interbank market) by 40-60 basis points. We also find that there is a pass-through effect from the secondary market to the primary market: the spreads of the treated bonds newly issued in the interbank market were reduced by 53 basis points.

Keywords: Unconventional Monetary Policy, Collateral, Bond Spread, Medium-Term Lending Facility

JEL Classification: E52, E58, G12

Suggested Citation

Fang, Hanming and Wang, Yongqin and Wu, Xian, The Collateral Channel of Monetary Policy: Evidence from China (January 1, 2022). PIER Working Paper No. 20-008 , Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: or

Hanming Fang (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yongqin Wang

Fudan University ( email )

Xian Wu

University of Wisconsin - Madison ( email )

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