Finance and Economics Discussion Series (FEDS)
December 2016
Monetary Policy Implementation and Private Repo Displacement: Evidence from the Overnight Reverse Repurchase Facility
Alyssa G. Anderson and John Kandrac
Abstract:
In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from substitution out of private repo. However, we also demonstrate that cash lenders, when investing in the ONRRP, do not cease trading with any of their dealer counterparties, highlighting the importance of lending relationships in the repo market. Lastly, using a confidential data set of repo transactions, we find that the presence of the Fed as a borrower in the repo market increases th e bargaining power of cash lenders, who are able to command higher rates in their remaining private repo transactions.
Keywords: Federal Reserve, Monetary policy, Money market mutual funds, Repo
DOI: https://doi.org/10.17016/FEDS.2016.096
PDF: Full Paper