The liquidity state-dependence of monetary policy transmission

Rodrigo Guimaraes, Gabor Pinter and Jean-Charles Wijnandts

No 1045, Bank of England working papers from Bank of England

Abstract: The large reactions of long-term government bond yields to monetary policy shocks occur during periods of higher market liquidity, and there is very little reaction during periods of lower liquidity. This newly documented liquidity state-dependence persistently affects real yields, term premia as well as long-term mortgage rates. Balance sheet constraints on both hedge funds and dealers contribute to the liquidity state-dependence. Conditioning on market liquidity yields stronger state-dependence than simply conditioning on macroeconomic indicators. Our results underscore the importance of market functioning, and the financial health of key intermediaries that support it, for implementing stabilisation policies.

Keywords: Monetary Policy Shocks; Market Liquidity; Real Term Premium; Intermediary Asset Pricing. (search for similar items in EconPapers)
JEL-codes: E40 E50 G12 G23 (search for similar items in EconPapers)
Pages: 124 pages
Date: 2023-10-19
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1045

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