Money Market Disconnect

A repurchase agreement (repo) is a source of funding and collateral. We document that
the money market is more segmented when the collateral motive prevails. Two crucial
aspects of the central bank framework lead to this disconnect: banks' access to the
central bank's deposit facility and assets' eligibility for Quantitative Easing (QE). We
show that repo rates lent by banks with access to the deposit facility and secured by
QE eligible assets are more collateral-driven and disconnected from funding-based money
market rates. Our results are relevant for different monetary policies and have suggestive
implications for the monetary policy pass-through.