The Role of Ambiguity in the Monetary Policy Transmissions: Evidence from the European Repo Market

Natalie Kessler and Poramapa Poonpakdee

Working Papers from DNB

Abstract: We develop a method to measure ambiguity—uncertainty about the distribution of out-comes—in asset markets, using the volatility of the empirical distribution of unpredictable components in transaction prices. For comparison, we measure risk as the volatility of the unpredictable price component itself, following the conventional practice of using the cross-sectional standard deviation. Applying this framework to 22 million secured lending transactions in the EU, we estimate ambiguity and risk perceived by major money market lenders. Unexpected monetary policy tightening raises both measures. Higher ambiguity reduces repo market liquidity by lowering loan volumes and increasing repo rates, thereby amplifying contractionary effects. Higher risk lowers loan volumes but also repo rates, partly dampening contractionary effects. Our results suggest that ambiguity plays a distinct and quantitatively important role in monetary policy transmission that is overlooked when fo-cusing on risk alone.

Keywords: Ambiguity and Risk; Repurchase Agreements; Monetary Policy Transmission; Liquidity Provision (search for similar items in EconPapers)
JEL-codes: D43 D86 E52 G24 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:847

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