The central bank’s balance sheet and treasury market disruptions

Adrien d'Avernas, Quentin Vandeweyer and Damon Petersen

No 3066, Working Paper Series from European Central Bank

Abstract: This paper studies how Treasury market dynamics depend on adjustments to the central bank balance sheet. We introduce a dynamic model of Treasury bonds with traditional and shadow banks. In the model, both Treasury and repo market disruptions arise as a joint consequence of three frictions: (i) balance sheet costs,(ii) intraday reserves requirements, and (iii) imperfect substitutability between repo and bank deposits. Our model highlights the critical role of both sides of the central bank’s balance sheet as well as agents’ anticipation of shocks and policy interventions in matching observed market dynamics. JEL Classification: E43, E44, E52, G12

Keywords: basis trade; hedge funds; liquidity risk; repo; reserves; shadow banks (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-dge and nep-mon
Note: 3107481
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253066

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