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

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

No 2017-39, Working Papers from Federal Reserve Bank of St. Louis

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 caused 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 10.6% of amounts outstanding. The steepening of peripheral sovereign yield curves after the policy announcement is consistent with the equilibrium effects of the collateral trade.

Keywords: Lender of Last Resort; Unconventional Monetary Policy; Collateral; Sovereign Debt; Eurozone Crisis (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-cfn, nep-eec, nep-mac and nep-mon
Date: 2017-11-01
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Related works:
Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2017) Downloads
Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2016) Downloads
Working Paper: The (unintended?) consequences of the largest liquidity injection ever (2016) Downloads
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