John Kandrac

The Costs of Quantitative Easing: Liquidity and Market Functioning Effects of Federal Reserve MBS Purchases

In this paper, I evaluate one of several commonly cited potential costs of quantitative easing. Specifically, I assess the effect of ongoing Federal Reserve mortgage-backed securities (MBS) purchases on MBS market liquidity. Examining several standard liquidity indicators, I find that Federal Reserve MBS purchases adversely affected average trading volume, trade sizes, and the number of trades. Bid-ask spreads remained mostly unaffected, although a spread widening in response to Fed purchases evidently emerged just after the beginning of the largest MBS purchase program. Although the marginal liquidity effects of purchases can be sizable, the economic magnitude of the effects is relatively modest when taking into account the size of Federal Reserve MBS operations. Lastly, I find no evidence of impaired price discovery in the MBS market during the time of Federal Reserve purchases.

Monetary Policy Implementation and Financial Stability: Evidence from the Overnight Reverse Repurchase Facility

In this paper, we examine the Federal Reserve’s newest policy tool, known as the overnight reverse repo (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP, we show that private repo activity is crowded out when money funds invest in the ONRRP. Additionally, we find that the ONRRP increases lenders’ bargaining power, thereby raising borrower funding costs. Lastly, we show that repo borrowers reallocate to repo backed by riskier collateral and borrow more from ONRRP-ineligible asset managers, both of which could increase financial vulnerability due to instability in dealer funding. Received April 27, 2017; editorial decision October 19, 2017 by Editor Stijn Van Nieuwerburgh.

Bank Failure, Relationship Lending, and Local Economic Performance

Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques as well as cross-sectional variation in bank failures, I show that recent bank failures lead to lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing agreements tend to be less deleterious to local economies, supporting the notion that the importance of bank failure to local economies stems from banking and credit relationships. Finally, I show that markets with more inter-bank competition are more strongly affected by bank failure.