The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Matteo Crosignani (),
Miguel Faria-e-Castro and
No 2017-39, Working Papers from Federal Reserve Bank of St. Louis
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
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (5) Track citations by RSS feed
Downloads: (external link)
https://files.stlouisfed.org/files/htdocs/wp/2017/2017-039.pdf Full text (application/pdf)
https://doi.org/10.20955/wp.2017.039 https://doi.org/10.20955/wp.2017.039 (text/html)
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2017-039
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Kathy Cosgrove ().