Central Banks As Market Makers: The Global Diffusion of Repo Markets

The worldwide spread of independent and transparent central banks has been studied as a paradigmatic case of institutional isomorphism in the literature on diffusion. However, the changes this diffusion engendered in the ‘engine room’ of economic state agency have received far less attention. This paper is concerned with the dynamic interaction between the diffusion of market-based central banking and market-based banking, or shadow banking. The implementation and transmission of monetary policy depend on financial institutions and markets. Since they provide the infrastructure of monetary governance, these institutions and markets are shaped to a considerable extent by central banks. As central banks replaced direct lending to banks by open market transactions in repo markets, they transformed themselves into key market makers. This marketization of central bank agency facilitated and fostered the diffusion of repo markets, the beating hearts of shadow banking. Our paper traces the global diffusion of this marketization from the core of the financial system (US & euro area) to emerging economies (China & Philippines).