Two Monetary Tools: Interest Rates and Haircuts
نویسنده
چکیده
Financial institutions play a key role as credit providers in the economy, and liquidity crises arise when they become credit constrained themselves. In such liquidity crises, financial institutions’ ability to borrow against their securities plays a key role, as Bagehot points out. In the private markets, it can become virtually impossible to borrow against certain illiquid securities, and, more broadly, the “haircuts” (also called margin requirements) on many securities increase in crises. Furthermore, security pricesmaydrop significantly, especially for securitieswith high haircuts. To alleviate the financial institutions’ funding problems, and their repercussions on the real economy, central banks have a number ofmonetary policy tools available, such as interest rate cuts and lending facilities with low haircuts. This paper studies the links between haircuts, required returns, and real activity, and evaluates the different monetary policy tools theoretically and empirically. In a production economy with multiple sectors financed by agents facingmargin constraints, we show that binding constraints increase required returns and propagate business cycles. The central bank policy of reducing the interest rate decreases the required returns of low-haircut assets but may increase those of high-haircut assets, since it may increase the shadow cost of capital for constrained agents. A reduction in the haircut of an asset unambiguously lowers its required return and can ease the funding constraints on all assets.
منابع مشابه
Comments on Ashcraft, Garleanu, and Pedersen, “Two Monetary Tools: Interest Rates and Haircuts”∗
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