Frictions in scaling up central bank balance sheet policies: How Eurosystem asset purchases impact the repo market

Tomás Carrera de Souza and Tom Hudepohl

Journal of Banking & Finance, 2024, vol. 158, issue C

Abstract: This paper examines the impact of the Eurosystem's increased footprint in financial markets, resulting from the response to the Covid-19 crisis, on repo rates. We exploit transaction-level data on the repo market and the Eurosystem's purchase programmes and find that both marginal purchases (flow effect) and aggregate holdings (stock effect) have a significant downward impact on repo rates. The stock effect is nonlinear, and amplified when the central bank's holdings are larger. Finally, we find that the Eurosystem's Securities Lending Facility alleviates this collateral scarcity, but it does not fully compensate for the downward pressure on rates created by purchases.

Keywords: Asset purchases; Unconventional monetary policy; Money market; Repo market; Specialness (search for similar items in EconPapers)
JEL-codes: E52 E58 G10 G15 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002285

DOI: 10.1016/j.jbankfin.2023.107037

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