Collateral-Based Monetary Policy: Evidence From China

Abstract

We exploit the unique institutional features of Chinese bond markets to estimate the causal effect of collateral-based monetary policy on asset prices and the real economy. A policy change allowed certain bonds to be used as collateral for the Medium-Term Lending Facility in the interbank market, while the same bonds in the exchange market remained ineligible. This change reduced the spreads of the newly eligible bonds by 37–53 basis points, or 10%–15% of the average spread in the secondary interbank market, with a strong pass-through rate of 67 to over 100% to the primary interbank market.