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The Price of Money: How Collateral Policy Affects the Yield Curve

Author

Listed:
  • Kjell G. Nyborg

    (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Jiri Woschitz

    (University of Zurich)

Abstract

Central-bank collateral policy governs the convertibility of assets into central-bank money provided directly by the central bank. Focusing on government bonds, we develop clean identification of variation in such convertibility by exploiting differential treatment of same-country government bonds in the euro area. Combining difference-in-differences analysis with yield-curve modeling on four separate events, we show that reduced convertibility lifts yields, but with the effect tapering off at longer maturities. Our findings imply that central-bank money is priced in the market and that a central bank can move and shape the yield curve through collateral policy.

Suggested Citation

  • Kjell G. Nyborg & Jiri Woschitz, 2021. "The Price of Money: How Collateral Policy Affects the Yield Curve," Swiss Finance Institute Research Paper Series 21-74, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2174
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    More about this item

    Keywords

    Yield curve; central bank; collateral policy; monetary policy; haircuts; repo; asset prices; liquidity; central-bank money; government bonds;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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