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Monetary Policy Implementation and Financial Vulnerability: Evidence from the Overnight Reverse Repurchase Facility

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  • Alyssa G Anderson
  • John Kandrac

Abstract

In this paper, we examine the Federal Reserve’s newest policy tool, known as the overnight reverse repo (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP, we show that private repo activity is crowded out when money funds invest in the ONRRP. Additionally, we find that the ONRRP increases lenders’ bargaining power, thereby raising borrower funding costs. Lastly, we show that repo borrowers reallocate to repo backed by riskier collateral and borrow more from ONRRP-ineligible asset managers, both of which could increase financial vulnerability due to instability in dealer funding. Received April 27, 2017; editorial decision October 19, 2017 by Editor Stijn Van Nieuwerburgh.

Suggested Citation

  • Alyssa G Anderson & John Kandrac, 2018. "Monetary Policy Implementation and Financial Vulnerability: Evidence from the Overnight Reverse Repurchase Facility," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3643-3686.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:9:p:3643-3686.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx141
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    Cited by:

    1. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2024. "Monetary policy transmission in segmented markets," Journal of Financial Economics, Elsevier, vol. 151(C).
    2. di Iasio, Giovanni & Kaufmann, Christoph & Wicknig, Florian, 2022. "Macroprudential regulation of investment funds," Working Paper Series 2695, European Central Bank.
    3. Han, Song & Nikolaou, Kleopatra & Tase, Manjola, 2022. "Trading relationships in secured markets: Evidence from triparty repos," Journal of Banking & Finance, Elsevier, vol. 139(C).
    4. repec:fip:a00001:91177 is not listed on IDEAS
    5. repec:fip:a00001:90557 is not listed on IDEAS
    6. Sriya Anbil & Alyssa G. Anderson & Zeynep Senyuz, 2021. "Are Repo Markets Fragile? Evidence from September 2019," Finance and Economics Discussion Series 2021-028, Board of Governors of the Federal Reserve System (U.S.).
    7. repec:fip:a00001:95904 is not listed on IDEAS
    8. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard Anna Maria, 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," Journal of Financial Stability, Elsevier, vol. 70(C).
    9. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard A. M., 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," LSE Research Online Documents on Economics 121347, London School of Economics and Political Science, LSE Library.

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