Monetary Policy Disconnect

Abstract

We analyze and quantify how two forms of segmentation lead to the monetary policy disconnect. To do this, we study the monetary policy transmission through the main short-term funding market, the repurchase agreement (repo) market. First, the lending rates of banks with access to the central bank's deposit facility are less responsive to the monetary policy target rate. Second, rates of repos secured by assets eligible for Quantitative Easing programs diverge more from the target rate. We also find that both forms of segmentation add to one another, suggesting an amplifying effect in weakening monetary policy transmission.