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ON RRP and Stability of the Tri-party Market

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  • Borghan Narajabad

    (Federal Reserve Board)

Abstract

The Federal Reserve uses the overnight reverse repo (ON RRP) as a monetary policy tool to provide a floor for overnight money market rates. The connection between the ON RRP and tri-party repo market provides an effective tool for interest rate control. But diverting funds away from the tri-party market to the ON RRP could hinder broker-dealers’ funding and cause a problem for the liquidity of various securities markets. The potential negative systemic effect of using the ON RRP could be amplified due to a multiplier effect of cash circulation through the reinvestment of cash collateral by securities lenders in repo. This paper provides a simple competitive search model to shed light on the interaction among the ON RRP eligible and ineligible cash lenders in the tri-party repo market. We use the model to study how the ON RRP rate and capacity affect broker-dealers’ funding. The calibrated model is used to study the tradeoff between the effectiveness of the ON RRP as a monetary policy tool and the potential instability that it can pose.

Suggested Citation

  • Borghan Narajabad, 2017. "ON RRP and Stability of the Tri-party Market," 2017 Meeting Papers 1151, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1151
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    References listed on IDEAS

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    1. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling, pages 131-148, National Bureau of Economic Research, Inc.
    2. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    3. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
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    Cited by:

    1. Garth Baughman & Francesca Carapella, 2020. "Voluntary Reserve Targets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 583-612, March.

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