The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Matteo Crosignani (),
Miguel Faria-e-Castro and
No 2017-011, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)
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)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
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Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2019)
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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