Fiorella De Fiore, Bank for International Settlements
Harald Uhlig, University of Chicago
Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. We develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. This is due to the decline in unsecured lending and rise in observed haircuts increasing the scarcity, and so the cost, of collateral for banks. We show how central bank policies which offer collateralised lending at attractive rates can attenuate this effect
Sebastian Doerr, Bank for International Settlements
Egemen Eren, Bank for International Settlements
Semyon Malamud, École Polytechnique Fédérale de Lausanne
Abstract: We present a new channel through which US money market funds (MMFs) affect the pricing of near-money assets and the convenience yield on T-bills. We build a theoretical model in which MMFs' strategic interactions generate frictions that are exacerbated by illiquidity in the T-bill market. Using instrumental variables, we show that MMFs have an economically significant price impact in the T-bill market. Consistent with strategic behavior, they internalize this price impact when setting repo rates. Moreover, they tilt their portfolios towards repos with the Federal Reserve when the T-bill market is illiquid. We provide evidence which suggests that the frictions highlighted in our analysis drive a sizeable part of common measures of T-bill convenience yields, especially since 2022. Our results have implications for monetary policy transmission, government debt issuance, and regulation of the MMF industry.
Discussant: Jean-David Sigaux, European Central Bank
Domenico Giannone, Federal Reserve Bank of New York
Gabriele La Spada, Federal Reserve Bank of New York
John Williams, Federal Reserve Bank of New York
Abstract: What level of central bank reserves satiates banks’ demand for liquidity? We provide a model of the reserve demand curve in the United States and estimate it at daily frequency over 2010-2021 using an instrumental-variable approach combined with a time-varying vector autoregressive model. This paper makes a methodological contribution in providing an approach that can address the three main issues affecting the estimation of the reserve demand curve: nonlinearity, time variation due to slow-moving structural changes, and endogeneity. We have three main empirical findings. First, as predicted by economic theory, the reserve demand curve is highly nonlinear with a clear satiation level: it is flat when reserves in the banking system are sufficiently abundant; and increasingly negatively sloped as reserves decline below the satiation point, moving from ample to scarce. Second, the reserve demand curve has shifted horizontally: in the earlier part of the sample, we observe a significantly negative slope when reserves are below 12% of banks’ assets; in the second half, when reserves drop below 13%. These findings suggest that banks’ demand for reserves has increased over time. Third, the curve has also shifted vertically, especially in the later period. This observation implies that the level of the federal funds-IORB spread may not be the appropriate summary statistic for the rate sensitivity to reserve shocks. Finally, we show that our methodology can be used in real-time to monitor the market for reserves and assess the ampleness of reserves.
