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The (unintended?) consequences of the largest liquidity injection ever

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

No 31, ESRB Working Paper Series from European Systemic Risk Board

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. JEL Classification: E58, G21, G28, H63

Keywords: Lender of Last Resort; Sovereign Debt; Unconventional Monetary Policy (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
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Related works:
Journal Article: The (Unintended?) consequences of the largest liquidity injection ever (2020) Downloads
Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2017) Downloads
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
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