Abstract

http://ssrn.com/abstract=2213690
 
 

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Central Bank Liquidity Provision and Collateral Quality


Francois Koulischer


ECARES, Universite Libre de Bruxelles; Banque de France

Daan Struyven


Massachusetts Institute of Technology (MIT) - Department of Economics

September 1, 2014

Journal of Banking and Finance, Vol. 49, No. 12, 2014

Abstract:     
Should central banks lend against low quality collateral? We characterize efficient central bank collateral policy in a model where a bank borrows from the interbank market or the central bank. Collateral has favorable incentive effects but is costly to transfer to lenders who value the collateral less because of imperfect collateral quality. We show that a fall in the quantity or the quality of the bank's collateral can increase interest rates in the economy even with a constant policy rate. A looser central bank collateral policy can reduce the spread, alleviate the credit crunch and increase output.

Number of Pages in PDF File: 45

Keywords: collateral policy, asset encumbrance, repo, haircuts

JEL Classification: E58, G01, G20

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Date posted: May 14, 2013 ; Last revised: October 24, 2014

Suggested Citation

Koulischer, Francois and Struyven, Daan, Central Bank Liquidity Provision and Collateral Quality (September 1, 2014). Journal of Banking and Finance, Vol. 49, No. 12, 2014. Available at SSRN: http://ssrn.com/abstract=2213690 or http://dx.doi.org/10.2139/ssrn.2213690

Contact Information

Francois Koulischer (Contact Author)
ECARES, Universite Libre de Bruxelles ( email )
Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
Banque de France ( email )
Paris
France

Daan Struyven
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
Cambridge, MA 02139-4307
United States
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