The green premium of unconventional monetary policy: Evidence from the enlarged collateral framework by the People's Bank of China

We exploit the recent inclusion of green bonds to the "Eligible Collateral Assets" (ECAs) for the "Medium-term Loan Facility" (MLF) by the People's Bank of China (PBOC) as a quasi-natural experiment and analyze its impact on the credit spreads between green and non-green bonds. We use the daily bond market data and employ the difference-in-differences (DID) model for analysis. Adding green bonds to the pool of ECAs by the PBOC significantly reduces the credit spreads (the required return on green bonds was higher earlier). The policy has a more prominent effect on the bonds issued by high-rated and local banks, as well as the ones situated in the Green Finance Reform Innovation Pilot Zones (GFRIPZ). The results of the parallel trend test indicate that the policy effect has a short-term lag, but overall, it shows a trend of continuous enhancement during the sample period.