Safe Asset Scarcity and Monetary Policy Transmission

Benoit Nguyen, Davide Tomio and Miklos Vari

Working papers from Banque de France

Abstract: Most central banks exited their decade-long accommodative monetary policy cycle by first raising rates, rather than starting by reducing their balance sheet. We show that the scarcity of government bonds---which were purchased under QE and held by the Eurosystem---reduces the transmission of rate hikes to money market rates. In July 2022, when the ECB increased its policy rates by 50bp for the first time in a decade, rates of repo transactions collateralized by the scarcest bonds increased by only 35bp. We show that this imperfect pass-through to repo rates is priced in treasury yields. Heterogeneous bond holdings across institutions imply that collateralized funding costs vary significantly across European institutions.

Keywords: Natural Disasters; Extreme Weather; Inflation; Disaggregate Inflation; Inequality; Price Gouging (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 G21 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2023
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:934

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