Repo Specialness in the Transmission of Quantitative Easing

Abstract

I show that the repo specialness of sovereign bonds can magnify the transmission of central bank quantitative easing into the real economy. Investors who cannot take advantage of the repo specialness of government bonds substitute for government bonds with riskier assets, such as corporate bonds. The extra demand from this portfolio substitution lowers corporate financing costs. I quantify the magnitude of this repo specialness channel for quantitative easing (QE) transmission in the context of the Public Sector Purchase Program of the Eurosystem.