A repurchase agreement (repo) is a source of funding and collateral. We document that the money market is more segmented when the collateral motive prevails. Two crucial aspects of the central bank framework lead to this disconnect: banks’ access to the central bank's deposit facility and assets’ eligibility for Quantitative Easing (QE). We show that repo rates lent by banks with access to the deposit facility and secured by QE eligible assets are more collateral-driven and disconnected from funding-based money market rates. Our results are relevant for different monetary policies and have suggestive implications for the monetary policy pass-through.

Past Presentations: AEA Annual Meeting 2021, ECB-RFS Macro-Finance Conference, Annual Congress of the Swiss Society of Economics and Statistics, University of St.Gallen PhD Seminar, SFI Research Days, World Finance Conference, Annual Conference of the Money, Macro, Finance Society, SNB Research Conference, 16th Central Bank Conference on the Microstructure of Financial Markets, ECB Money Market Conference 2022 (see video on the left).

We propose a model of the Eurozone and analyze an asymmetric recession in a vulnerable member state characterized by a trilemma of high public debt, weak banks, and deteriorating competitiveness. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short-run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.

The higher aggregate prevalence of loan over bond funding in Europe is not only driven by the well-documented differences in financial market settings but also strongly shaped by different firm characteristics. The European economy is more fragmented than the U.S. economy, and thus features a different firm distribution in terms of size and collateral availability. I estimate that if all European firms had access to a financial market like the U.S. market, their aggregate bond funding share would remain significantly smaller. This counterfactual suggests a limited potential for European corporate bond markets in the short and medium term.

Past Presentations: 1st CEPR Frankfurt Hub Conference on EURO at 25 and beyond, AEA Annual Meeting 2023 (poster session), World Finance Conference, FMA Conference, RCEA Conference, 29th Finance Forum