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The Collateral Channel of Monetary Policy: Evidence from China

Hanming Fang (), Yongqin Wang () and Xian Wu ()
Additional contact information
Yongqin Wang: Fudan University
Xian Wu: University of Wisconsin

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it di?cult to empirically identify their causal e?ects on the ?nancial market and the real economy. We exploit a quasi-natural ex-periment in China, where dual-listed bonds are traded in two mostly segmented markets: the interbank market regulated by the Central Bank, and the exchange market regulated by the securities regulator. During a policy shift in our study period, China’s Central Bank included a class of previously ineligible bonds in the interbank market to become eligible collateral for ?nancial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-di?erence strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We ?nd that in the secondary market the policy reduced the spreads of the newly collateralizable bonds in the treatment market (the interbank market) by 42-62 basis points. We also ?nd that there is a pass-through e?ect from the secondary market to the primary market: the spreads of the treated bonds newly issued in the interbank market were reduced by 54 basis points.

Keywords: Unconventional Monetary Policy; Collateral; Bond Spread; Medium-Term Lend-ing Facility (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020-02-18
New Economics Papers: this item is included in nep-cba, nep-cna, nep-mac and nep-mon
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