The Importance of Being Special: Repo Markets During the Crisis

Corradin, Stefano; Maddaloni, Ángela

doi:10.2139/ssrn.3466197

Cited by 29 publications

(48 citation statements)

References 30 publications

(54 reference statements)

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“…To achieve inflation targets in the post-crisis period, central banks created an environment of low or even negative interest rates and applied various unconventional monetary policy tools, such as quantitative easing, which influences government bond yield curves (Corradin & Maddaloni, 2017;Ferdinandusse, Freier, & Ristiniemi, 2017;Schlepper, Riordan, Hofer, & Schrimpf, 2017). In 2013, the CNB adopted an exchange rate commitment to intervene in the foreign exchange market.…”

Section: Stylized Factsmentioning

confidence: 99%

Debt management when monetary and fiscal policies clash: some empirical evidence

Hodula

Melecky

2020

Journal of Applied Economics

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We explore the effects of fiscal and monetary policy shocks on key debt management variables and provide empirical evidence supporting the notion of a strict separation of economic policy from the debt management agenda. We find that a tighter monetary policy coupled with fiscal expansion increases the risk that government debt will have to be rolled over at unusually high cost. This is especially the case in a downturn, where low or even negative interest rates often provide incentives for debt managers to invest predominantly in short-term bonds. Our findings echo the postcrisis environment of low or even negative interest rates, where many debt managers altered their portfolios' structure in favor of short-term bonds. In this respect, we argue that debt managers should use a longer optimization horizon and base their strategy on the medium-and long-term economic outlook.

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Section: Stylized Factsmentioning

confidence: 99%

Debt management when monetary and fiscal policies clash: some empirical evidence

Hodula

Melecky

2020

Journal of Applied Economics

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“…Recently the International Capital Markets Association (2016) released a study warning of reduced liquidity in the European repo market due to regulation and QE. Corradin and Maddaloni (2015) show that during the ECB securities purchases programme (SMP), the government bonds that were purchased became special, meaning that their price contained a scarcity premium. During the first public sector asset purchase programme, initially the same effect was at play, but once the ECB began to sell the bonds it purchased back on the repo market, the specialness premium on the bonds diminished (European Securities and Market Authority (2016)).…”

Section: Introductionmentioning

confidence: 99%

Quantitative Easing and the Price-Liquidity Trade-Off

2017

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We present a search theoretic model of over-the-counter debt with quantitative easing (QE). The impact of central bank asset purchases on yields depend on market tightness, which is determined by shares of preferred habitat investors. The model predicts that the impact of government bond purchases is higher in countries with a higher share of preferred habitat investors. Furthermore, there is a trade-off with liquidity, which is not present in other models of QE. We present a new index for the share of preferred habitat investors holding government bonds in Eurozone countries, based on the ECB's securities and holdings statistics, which we use to match the impact of QE on the observed yield changes in data and to test our model.

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“…Three other studies relate the asset purchases by the Eurosystem to bond scarcity. Corradin and Maddaloni (2017) show that during the ECB securities market programme (SMP), the government bonds that were purchased became special, meaning that their price contained a scarcity premium. Based on high frequency German Bund data, Schlepper et al (2017) show that ECB's asset purchases led to an increased scarcity of Bunds and this effect has increased over time.…”

Section: Literature Reviewmentioning

confidence: 99%