Treasury bills and bonds: where (and when) is the demand?
Taking advantage of the re-issuance policy of the French Treasury, we show that additional issuances of short-term debt (bills) increase yields by four times less than additional issuances of long-term debt (bonds). This leads governments to issue more bills when they need cash quickly. The modest price impact of bills is not due to their higher liquidity, low duration, nor the dash-for-cash during crises. Rather, the different properties of bills and bonds stem from preferred habitat and the strong demand of foreign central banks for French short-term debt.
Safe asset scarcity and monetary policy transmission
with Benoit Nguyen (ECB) and Davide Tomio (Texas A&M)
Most central banks exited their decade-long accommodative monetary policy cycle by first raising rates, rather than starting by reducing their balance sheet. We show that the scarcity of government bonds—which were purchased under QE and held by central banks—reduces the transmission of rate hikes to money market rates. In July 2022, when the ECB increased its policy rates by 50bp for the first time in a decade, rates of repo transactions collateralized by the scarcest bonds increased by only 30bp. We show that this imperfect pass-through to repo rates is priced in treasury yields. Heterogeneous bond holdings across institutions imply that collateralized funding costs vary significantly across European institutions.
Paying Banks to Lend? Evidence from a central bank transfer and the euro area credit registry
with Emilie Da Silva (BdF), Vincent Grossmann-Wirth (IMF) and Benoit Nguyen (ECB)
(Submitted)
In response to the pandemic, the Eurosystem embedded a transfer mechanism in its lending operations to the banking system, during a "Special Interest Rate Period''. Using the newly available euro area credit registry, we study the effect of this direct transfer to banks. We exploit an exogenous change in the size of the program and find statistically significant effects on credit supply. We compare the impact of this program to other government interventions to support the banking system in times of crisis.
A dilemma between liquidity regulation and monetary policy: history and theory
with Eric Monnet (PSE & CEPR)
Journal of Money, Credit and Banking (2022)
[WP version] [journal version] [bib citation]
This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.
The scarcity effect of QE on repo rates: evidence from the Euro-Area
with William Arrata (BdF), Benoît Nguyen (ECB) and Imène Rahmouni-Rousseau (ECB)
Journal of Financial Economics (2020)
[WP version] [journal version] [bib citation]
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.
Monetary policy transmission with interbank market fragmentation
Journal of Money, Credit and Banking (2020)
[WP version] [journal version] [bib citation]
This paper shows how interbank market fragmentation disrupts the transmission of monetary policy. Fragmentation is the fact that banks, depending on their country of location, have different probabilities of default on their interbank borrowings. Once fragmentation is introduced into standard theoretical models of monetary policy implementation, excess liquidity arises endogenously. This leads short-term interest rates to depart from the central bank policy rates. Using data on cross-border financial flows and monetary policy operations, it is shown that this mechanism has been at work in the Euro-Area since 2008. The model is used to analyze conventional and unconventional monetary policy measures.