Central bank asset purchases and lending: Impact on search frictions

Reiko Tobe and Jun Uno

Journal of Financial Intermediation, 2024, vol. 58, issue C

Abstract: We investigate the impact of two central bank policies, asset purchases and asset lending, on the search frictions in the government bond market in Japan. We build a search-theoretic model to explore the impact of a central bank’s securities lending facility (SLF) by introducing a central bank as a lender. We test model predictions using intraday data from an electronic platform for Japanese government bonds. First, we find large-scale asset purchases (LSAPs) increase order imbalance in the repurchase agreement (repo) market. Threshold analysis reveals that asset purchase amounts exceeding 0.18% of the outstanding, which corresponds to 38.98% of our sample, cause a significantly higher imbalance. Second, the SLF has a floor effect on the repo rate by affecting dealers’ choices between the repo market and the SLF. Third, the novel friction measures we test show that LSAPs and the SLF have opposite influences on bargaining power in the repo market.

Keywords: Order imbalance; Sovereign bonds; Large-scale asset purchases; Bargaining power; Repo (search for similar items in EconPapers)
JEL-codes: C54 E43 E52 E58 G12 G14 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:58:y:2024:i:c:s1042957324000032

DOI: 10.1016/j.jfi.2024.101075

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