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Money Market Funds and Unconventional Monetary Policy

Giovanna Bua, Peter Dunne () and Jacopo Sorbo
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Giovanna Bua: Central Bank of Ireland
Jacopo Sorbo: Unipol Gruppo S.p.A.

No 7/RT/19, Research Technical Papers from Central Bank of Ireland

Abstract: Using a unique dataset, covering more than 40 percent of euro area money market funds by asset value, we assess monetary policy effects on fund behaviour and performance.We find a strong but heterogeneous association between fund performance and the policy rate of the currency in which funds report and from this we ascertain how different combinations of conventional and unconventional monetary policies affect fund behaviour. Evidence from the speed of response to policy changes indicates a shortening of investment term when policy is easing and vice versa. This has supply-offunding implications across the first two years of the term structure. When euro area monetary policy is at its limit and when policy is expanded to include the use of unconventional measures, the gap between the rate earned at the ECB’s deposit facility and the yield on short term debt securities widens. In these conditions euro-reporting funds make indirect recourse to the deposit facility and raise their investments in euro-denominated tradable certificates of deposits. This behaviour progressively reduces the impact of unconventional measures on MMF performance. Otherwise, heterogeneity in fund responses to the monetary policy mix can be attributed to differential mandates and involves some combination of increased risktaking and diversification into assets issued by foreign entities.

Keywords: Money Market Funds; Monetary Policy; Negative Interest Rates. (search for similar items in EconPapers)
JEL-codes: E52 G15 G23 G28 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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