Working Paper Series no. 278: Central bank liquidity and market liquidity: the role of collateral provision on the French government debt securities market

Abstract

We examine the effects of collateral provision as a potential channel between funding liquidity tensions and the scarcity of market liquidity. This channel consists in transferring the credit risk associated with refinancing operations between financial institutions to market participants that bear new liquidity risk on the market associated with collateral. In particular, we address the issue of the liquidity of the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. We use a time-varying transition probability (TVTP) VAR model considering both the monetary policy cycle and the cycle of French treasury auctions. We highlight the existence of a specific regime in which monetary policy neutrality is not verified on the market for French bonds. Moreover, the existence of conventional and unconventional regimes leads to asymmetries in monetary policy implementation.

Sanvi Avouyi-Dovi and Julien Idier
January 2010

Classification JEL : G10, C22, C53

Keywords : Monetary policy, collateral, liquidity, volatility, French bond market.