The Informational Content of SMP Deposit Auctions in Forecasting Short-Term Repurchase Agreement Interest Rates (Dissertation)

Abstract

This paper analyzes the term deposit sterilizing open market operations conducted by the Eurosystem between May 2010 and June 2014 in the context of the Securities Market Program (SMP). The SMP operations involved outright purchases of government debt securities in the secondary market with a view of lowering the credit spreads of stressed Euro periphery countries after the eruption of the Greek sovereign debt crisis in 2010. I investigate the details of the program, the execution of the term deposit auctions and their effects on short-term repurchase agreement (repo) interest rates. To do this I employ a stochastic model to determine how market participants bid at the auctions as well as several econometric models to look into how various monetary and market rates such as short-term repo, the MRO and the SMP deposit rates affect each other. The key result is that information extracted from SMP deposit auctions can be used by the central bank in order to create more accurate conditional forecasts of short-term money market interest rates, information that is not present in other regular Open Market Operations conducted by the Eurosystem. Lastly the case for an SMP debt certificate is presented which can increase the supply of safe assets in the Euro money market and help in the transmission of monetary policy.