Abstract
We empirically analyse the relationship between longer term central bank liquidity support and banks’ exposures to governments, using difference-in-differences panel regressions and propensity score matching on a large sample of banks in the euro area. The research question is whether the liquidity operations, which were introduced to prevent disorderly deleveraging, can also be linked to unintended changes in banks’ asset allocations, in particular to carry trades in government bonds. The results show that unconditional and conditional refinancing operations have a different effect on banks’ government exposures. Unconditional longer-term refinancing operations went together with more carry trades in stressed countries, i.e. banks borrowing more while increasing their holdings of government bonds. In contrast, refinancing operations that were conditional on banks’ lending were not associated with such carry trades, highlighting the benefits of conditionality attached to long-term refinancing operations.
Original language | English |
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Pages (from-to) | 1788-1806 |
Number of pages | 19 |
Journal | Applied Economics |
Volume | 53 |
Issue number | 15 |
Early online date | 9 Feb 2021 |
DOIs | |
Publication status | Published - 2021 |
Bibliographical note
Publisher Copyright:© 2020 Informa UK Limited, trading as Taylor & Francis Group.
Keywords
- banking
- Central bank liquidity
- financial intermediation
- monetary transmission