Working Paper: NBER ID: w26792
Authors: Hanming Fang; Yongqin Wang; Xian Wu
Abstract: 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 find that in the secondary market the policy reduced the spreads of the newly collateralizable bonds in the treatment market (the interbank market) by 42-62 basis points. We also find 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 54 basis points.
Keywords: Collateral; Monetary Policy; China; Bond Markets
JEL Codes: E44; E52; E58; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy shift on June 1, 2018 (O24) | reduction in spreads of newly collateralizable bonds in interbank market (F65) |
| reduction in spreads of newly collateralizable bonds in interbank market (F65) | reduction in spreads of newly issued bonds in interbank market (E43) |
| policy shift on June 1, 2018 (O24) | lower funding costs for bond issuers (G32) |
| policy shift on June 1, 2018 (O24) | enhances liquidity in the market (G10) |
| decrease in perceived default risk (E43) | reduction in spreads of newly collateralizable bonds in interbank market (F65) |