Government spending effectiveness depends critically on how it is financed. Using state dependent SVAR models and local projections on post-war US data, we show that fiscal expansions financed with short-term debt generate significantly larger output multipliers than those financed with long-term debt. This difference mainly stems from private consumption responses: short-term financing crowds in consumption while long-term financing does not. Torationalize this finding, we construct an incomplete markets model in which households invest in short-term and long-term assets.

The functioning of sovereign bond markets is closely intertwined with repo markets, where investors finance long positions and source bonds for short sales. We show, theoretically and empirically, how conditions in the cash bond market fundamentally shape repo rates: When demand for cash bonds exceeds available supply, arbitrageurs, notably hedge funds, step in to bridge the gap by shorting bonds and borrowing them in the repo market. These arbitrage strategies drive a wedge between monetary policy rates and repo rates, generating “specialness”.

Credit unions could benefit from several ideas put forward today by the Prudential Regulation Authority and Financial Conduct Authority aimed at helping the sector grow, innovate and meet the changing needs of their members.

The ‘Danish compromise’ makes it easier for Eurozone banks to own insurers, but the latter think it confers an unfair advantage