The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area

By William Arrata, Benoit Nguyen, Imene Rahmouni-Rousseau, Miklos Vari

December 7, 2018

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William Arrata, Benoit Nguyen, Imene Rahmouni-Rousseau, and Miklos Vari. The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area, (USA: International Monetary Fund, 2018) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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). In this paper, we explore empirically the interactions between the PSPP and repo rates. We document different channels through which asset purchases may affect them. Using proprietary data from PSPP purchases and repo transactions for specific (“special") securities, we assess the scarcity channel of PSPP and its impact on repo rates. We estimate that purchasing 1 percent of a bond outstanding is associated with a decline of its repo rate of 0.78 bps. Using an instrumental variable, we find that the full effect may be up to six times higher.

Subject: Asset and liability management, Banking, Bonds, Excess liquidity, Financial institutions, Financial markets, Financial services, Money markets, Repo rates, Securities

Keywords: Asset purchases, Bonds, Excess liquidity, GC rate, Monetary policy, Money market, Money markets, Repo market, Repo rate, Repo rates, SC rate, Securities, Specialness, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/258
Stock No:

WPIEA2018258
ISBN:

9781484386910
ISSN:

1018-5941

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