Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The (Unintended?) Consequences of the Largest Liquidity Injection Ever
We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.
Cite this item
Matteo Crosignani & Miguel Faria-e-Castro & Luis Fonseca, The (Unintended?) Consequences of the Largest Liquidity Injection Ever, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-011, Jan 2017.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
Keywords: Lender of Last Resort ; Sovereign Debt ; Unconventional Monetary Policy
This item with handle RePEc:fip:fedgfe:2017-11
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