The Collaternal Channel of Monetary Policy: Evidence from China (with Yongqin Wang and Xian Wu)

Topic:

The Collaternal Channel of Monetary Policy: Evidence from China (with Yongqin Wang and Xian Wu)

Time&Date: 

 09:15-10:30 am, 2019/12/16 (Monday)

Venue:

 Room W203, Administration Building

Speaker:

  Prof. Hanming Fang (University of Pennsylvania)

Abstract:

Since the Global Financial Crisis, collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it difficult to empirically identify their causal effects on the financial market and the real economy. We exploit a quasi-natural experiment in China, where dual-listed bonds are traded in two mostly segmented markets: the interbank market regulated by the Central Bank, and the exchange market regulated by the securities regulator. During a policy shift in our study period, China’s Central Bank included a class of previously ineligible bonds in the interbank market to become eligible collateral for financial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-difference strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We show that the policy reduced the spreads of the newly collateralizable bonds in the treated markets by 63-77 basis points. Interestingly, the funding costs of the whole interbank market also fell, due to greater availability of collateral in the market. We also show that there is a pass-through effect from the secondary market to the primary market: the spreads of the treated bonds newly issued in the interbank market were reduced by 51 basis points.