The (Unintended?) Consequences of the Largest Liquidity Injection Ever

Matteo Crosignani, Miguel Faria-e-Castro and Luís Fonseca

No 2017-011, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank?s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This \"collateral trade\" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.

Keywords: Lender of Last Resort; Sovereign Debt; Unconventional Monetary Policy (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 H63 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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https://www.federalreserve.gov/econresdata/feds/2017/files/2017011pap.pdf (application/pdf)

Related works:
Journal Article: The (Unintended?) consequences of the largest liquidity injection ever (2020)
Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2017)
Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2016)
Working Paper: The (unintended?) consequences of the largest liquidity injection ever (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-11

DOI: 10.17016/FEDS.2017.011

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