Monetary Policy Disconnect

Abstract

Although designed to support monetary policy, two crucial aspects of the central bank framework can disconnect the monetary policy transmission: banks’ access to central bank deposits and Quantitative Easing (QE). We show how both hinder the monetary policy transmission through the main short-term funding market, the repurchase agreement (repo) market. First, lending rates of banks with access to the deposit facility are less responsive to the monetary policy rate. Second, repo rates secured by assets eligible for QE programs are more disconnected from the policy rate. Both effects create rate dispersion and add to one another in weakening the monetary policy transmission.

Keywords: Interest rate pass-through, Monetary Policy, disconnect, short-term interest rates, repo

JEL Classification: E40, E43, E50, E52, E58, G18