The Role of Ambiguity in the Monetary Policy Transmissions: Evidence from the European Repo Market

Working paper 847
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Published: 05 November 2025

By: Natalie Kessler

We develop a method to measure ambiguity—uncertainty about the distribution of out-comes—in asset markets, using the volatility of the empirical distribution of unpredictable components in transaction prices. For comparison, we measure risk as the volatility of the unpredictable price component itself, following the conventional practice of using the cross-sectional standard deviation. Applying this framework to 22 million secured lending transactions in the EU, we estimate ambiguity and risk perceived by major money market lenders. Unexpected monetary policy tightening raises both measures. Higher ambiguity reduces repo market liquidity by lowering loan volumes and increasing repo rates, thereby amplifying contractionary effects. Higher risk lowers loan volumes but also repo rates, partly dampening contractionary effects. Our results suggest that ambiguity plays a distinct and quantitatively important role in monetary policy transmission that is overlooked when fo-cusing on risk alone.

Keywords: Ambiguity and Risk; Repurchase Agreements; Monetary Policy Transmission; Liquidity Provision
JEL codes E52; G24; D43; D86

Working paper no. 847

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Research highlights:
  • We introduce ambiguity (uncertainty about outcome probabilities) as a monetary policy transmission channel, and study its effect on liquidity provision using euro-area repo market data (MMSR).
  • We develop a method to measure market participants’ perceived ambiguity and risk by decomposing the unpredictable price component of heterogenous transactions.
  • We find that contractionary monetary policy shocks permanently raise risk and temporarily raise ambiguity; expansionary shocks lower both.
  • Ambiguity impacts monetary policy transmission through price adjustments, while risk reduces individual lending volumes and increases diversification.
  • Overall, contractionary monetary policy transmission is amplified by ambiguity via heightened price especially in the days between announced and implemented rate changes. On the contrary, risk has long-lasting dampening effect through diversification.

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