Money Markets, Collateral and Monetary Policy

53 Pages Posted: 3 Dec 2018 Last revised: 6 Sep 2024

See all articles by Fiorella De Fiore

Fiorella De Fiore

Bank for International Settlements (BIS) - Monetary and Economic Department

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Harald Uhlig

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: November 2018

Abstract

During the financial and sovereign debt crises, euro area interbank money markets underwent dramatic changes: the share of unsecured borrowing declined throughout the euro area, while private market haircuts on sovereign bonds and bank borrowing from the European Central Bank increased in the South. We construct a quantitative general equilibrium model to evaluate the macroeconomic impact of these developments and the associated policy response. Our model features heterogeneous banks and sovereign bonds, secured and unsecured money markets, and a central bank. We compare a benchmark policy—the central bank providing collateralized lending to banks at haircuts lower than the market—to an alternative policy that maintains a constant central bank balance sheet. We show that the fall in output, investment, and capital would have been twice as high under the alternative policy. More generally, the model allows the analysis of monetary policy tools beyond interest rate policies and quantitative easing.

Suggested Citation

De Fiore, Fiorella and Hoerova, Marie and Uhlig, Harald, Money Markets, Collateral and Monetary Policy (November 2018). NBER Working Paper No. w25319, Available at SSRN: https://ssrn.com/abstract=3294924

Fiorella De Fiore (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Marie Hoerova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.mariehoerova.net

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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