Two Monetary Tools: Interest Rates and Haircuts

41 Pages Posted: 7 Sep 2010 Last revised: 3 Oct 2010

See all articles by Adam B. Ashcraft

Adam B. Ashcraft

Federal Reserve Bank of New York

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2010

Abstract

We study a production economy with multiple sectors financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction of the interest rate can increase the required return of high-haircut assets since it can increase the shadow cost of capital for constrained agents. The required return can be lowered by easing funding constraints through lowering haircuts. To assess empirically the power of the haircut tool, we study the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). By considering unpredictable rejections of bonds from TALF, we estimate that haircuts had a significant effect on prices. Further, unique survey evidence suggests that lowering haircuts could reduce required returns by more than 3% and provides broader evidence on the demand sensitivity to haircuts.

Suggested Citation

Ashcraft, Adam B. and Garleanu, Nicolae Bogdan and Pedersen, Lasse Heje, Two Monetary Tools: Interest Rates and Haircuts (September 2010). NBER Working Paper No. w16337. Available at SSRN: https://ssrn.com/abstract=1672589

Adam B. Ashcraft (Contact Author)

Federal Reserve Bank of New York ( email )

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Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

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Berkeley, CA 94720
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HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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