Template-Type: ReDIF-Paper 1.0
Author-Name: Sebastian Doerr
Author-X-Name-First: Sebastian
Author-X-Name-Last: Doerr
Author-Name: Sebastian Egemen Eren
Author-X-Name-First: Egemen
Author-X-Name-Last: Eren
Author-Name: Semyon Malamud
Author-X-Name-First: Semyon
Author-X-Name-Last: Malamud
Title: Money market funds and the pricing of near-money assets
Abstract: US money market funds (MMFs) play an important role in short-term markets as large investors of Treasury bills (T-bills) and repurchase agreements (repos). We build a theoretical model in which MMFs strategically interact with banks and each other. These interactions generate interdependencies between repo and T-bill markets, affecting the pricing of these near-money assets. Consistent with the model's predictions, we empirically show that when MMFs allocate more cash to the T-bill market, T-bill rates fall, and the liquidity premium on T-bills rises. To establish causality, we devise instrumental variables guided by our theory. Using a granular holding-level dataset to examine the channels, we show that MMFs internalize their price impact in the T-bill market when they set repo rates and tilt their portfolios towards repos with the Federal Reserve when Treasury market liquidity is low. Our results have implications for the transmission of monetary policy, benchmark rates, and government debt issuance.
Creation-Date: 2023-05
File-URL: https://www.bis.org/publ/work1096.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1096.htm
File-Format: text/html
Number: 1096
Keywords: T-bills, repo, money market funds, near-money assets, liquidity
Classification-JEL: E44, G11, G12, G23
Handle: RePEc:bis:biswps:1096