The paper develops a general equilibrium model in which bonds serve both as investment opportunities and as collateral for loans. The model integrates the yield curve with the repo market. Preferred-habitat investors and arbitrageurs generate downward-sloping demand for bonds and upward-sloping supply of collateral. The results show that quantitative easing increases the relative collateral value of targeted bonds in the repo market, (i) strengthening local supply and (ii) dampening term premium effects of asset purchases. Academics and policymakers should consider the bond and the repo markets in combination since traded assets and economic agents are the same in both markets
SAFE Working Paper No. 395
