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Recently there have been discussions, both within the FOMC and more broadly, about whether the FOMC should set up a standing repo facility. Such a facility would allow banks to sell safe assets (U.S. Treasury securities) to the Fed, with the assurance of subsequent repurchase, in unlimited quantities at an administered rate. This is not a new idea. In fact, a similar facility was implemented in 1683 by the Bank of Amsterdam, the leading central bank of the time, and operated for more than a century afterward. In this article, we describe the motivations, operations, and limitations of the Bank of Amsterdam's facility and what lessons this historical experience offers for modern-day central banks.

Key findings:

  1. A standing facility can deepen markets for both collateral and reserves but can be vulnerable to large swings in its usage.
  2. A central bank may wish to offset (or "sterilize") such swings and these offsets may increase the central bank's need to engage in other types of market operations.
  3. In tail events, the scale of this sterilization can undermine a central bank's own credibility.

https://doi.org/10.29338/ph2020-01Off-site link

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