Template-Type: ReDIF-Paper 1.0
Author-Name: Oliver Ashtari-Tafti
Author-X-Name-First: Oliver
Author-X-Name-Last: Ashtari-Tafti
Author-Name: Rodrigo Guimaraes
Author-X-Name-First: Rodrigo
Author-X-Name-Last: Guimaraes
Author-Name: Gabor Pinter
Author-X-Name-First: Gabor
Author-X-Name-Last: Pinter
Author-Name: Jean-Charles Wijnandts
Author-X-Name-First: Jean-Charles
Author-X-Name-Last: Wijnandts
Title: The liquidity state dependence of monetary policy transmission
Abstract: We show that monetary policy shocks move long-term government bond yields only when market liquidity is high and arbitrageurs are well capitalized. This liquidity state dependence operates entirely through real term premia, not expectations. Using novel transaction-level data on the US Treasury market, we find that arbitrageurs trade about 40% more duration during FOMC meetings in high-liquidity periods. We propose ways of enriching standard term-structure models to rationalize our evidence that constraints on arbitrage capital suppress transmission. The results introduce new empirical moments for theories of limits to arbitrage, and underscore the role of liquidity conditions in shaping the effectiveness of conventional monetary policy.
Creation-Date: 2025-09
File-URL: https://www.bis.org/publ/work1289.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1289.htm
File-Format: text/html
Number: 1289
Keywords: monetary policy, long-term real rates, limited arbitrage, segmented markets
Classification-JEL: E43, E52, E58
Handle: RePEc:bis:biswps:1289