Quantitative Easing, Collateral Constraints, and Financial Spillovers

43 Pages Posted: 14 Dec 2018

See all articles by John Geanakoplos

John Geanakoplos

Yale University; Santa Fe Institute

Haobin Wang

Yale University; IMF

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2018


The steady application of Quantitative Easing (QE) has been followed by big and non-monotonic effects on international asset prices and international capital flows. These are difficult to explain in conventional models, but arise naturally in a model with collateral. This paper develops a general-equilibrium framework to explore QE’s international transmission involving an advanced economy (AE) and an emerging market economy (EM) whose assets have less collateral capacity. Capital flows arise as a result of international sharing of scarce collateral. The crucial insight is that private AE agents adjust their portfolios in different ways in response to QE, conditional on whether they are (i) fully leveraged, (ii) partially leveraged or (iii) unleveraged. These portfolio shifts of international assets can diminish or even reverse the effectiveness of ever-larger QE interventions on asset prices. The model provides a simultaneous interpretation of several important stylized facts associated with QE.

Keywords: Quantitative easing, Collateral, Leverage, Financial spillovers, Emerging markets, Capital flows

JEL Classification: D52, D53, E32, E44, E52, F34, F36, G01, G11, G12

Suggested Citation

Geanakoplos, John D and Wang, Haobin, Quantitative Easing, Collateral Constraints, and Financial Spillovers (December 10, 2018). Cowles Foundation Discussion Paper No. 2154, Available at SSRN: https://ssrn.com/abstract=3300344 or http://dx.doi.org/10.2139/ssrn.3300344

John D Geanakoplos (Contact Author)

Yale University ( email )

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HOME PAGE: http://https://economics.yale.edu/people/faculty/john-geanakoplos

Santa Fe Institute ( email )

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Haobin Wang

Yale University ( email )

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United States

IMF ( email )

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Washington, DC 20431
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