Credit Risk and Discontinuous Effects of Monetary Reverse Transactions

22 Pages Posted: 23 May 2016

See all articles by Dimitrios P. Tsomocos

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall

Dimitris Voliotis

University of Piraeus - Department of Banking and Financial Management

Date Written: May 1, 2016

Abstract

A central bank possesses various instruments to provide liquidity. These are either outright monetary transactions (OMT) of securities or other refinancing facilities, primarily repos, which are executed with standard tenders. The eligible securities (i.e. bonds or equities) need to conform with certain credit risk criteria (i.e., satisfactory credit rating or low default probability). This paper introduces a monetary model to address the role of collateralized securities on the effectiveness of monetary policy. Our results suggest that credit rating downgrading may precipitate into a disproportionate credit contraction.

Keywords: collateralized securities; central banks; endogenous tender rate

JEL Classification: D53, E41, E51, E52, E58

Suggested Citation

Tsomocos, Dimitrios P. and Voliotis, Dimitris, Credit Risk and Discontinuous Effects of Monetary Reverse Transactions (May 1, 2016). Saïd Business School WP 2016-16, Available at SSRN: https://ssrn.com/abstract=2783337 or http://dx.doi.org/10.2139/ssrn.2783337

Dimitrios P. Tsomocos (Contact Author)

University of Oxford - Said Business School and St. Edmund Hall ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

Dimitris Voliotis

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

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