The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area
IMF Working Papers, December 7, 2018
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Bibliographic details
- Authors: William Arrata, Benoit Nguyen, Imene Rahmouni-Rousseau, Miklos Vari
- Published: December 7, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484386910.001
Summary of research question and context
- Most short-term interest rates in the Euro area are below the European Central Bank deposit facility rate, the rate at which the central bank remunerates banks’ excess reserves.
- This unexpected development coincided with the start of the Public Sector Purchase Program (PSPP).
- The paper explores empirically the interactions between the PSPP and repo rates and documents different channels through which asset purchases may affect repo rates.
Data and empirical approach
- Uses proprietary data from PSPP purchases and repo transactions for specific (“special") securities.
- Employs an instrumental variable to assess causal effects of PSPP purchases on repo rates.
Key empirical findings
- Purchasing 1 percent of a bond outstanding is associated with a decline of its repo rate of 0.78 bps.
- Using an instrumental variable, the estimated full effect may be up to six times higher.
Theoretical/interpretative points
- The paper assesses the scarcity channel of PSPP: large-scale asset purchases reduce the supply of specific securities available for repo, affecting their specialness and repo pricing.
- Multiple channels through which asset purchases may affect repo rates are documented (scarcity/specialness is emphasized).
Policy-relevant implications
- Large-scale asset purchase programs such as PSPP can materially affect money market functioning and pricing through scarcity effects on specific securities.
- The magnitude of repo-rate effects may be substantially larger than simple correlations suggest when endogeneity is addressed (instrumental variable results).