Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy

25 Pages Posted: 8 Dec 2021

See all articles by Jakob Vestergaard

Jakob Vestergaard

Roskilde University - Department of Social Sciences and Business

Daniela Gabor

University of the West of England (UWE)

Date Written: December 1, 2021

Abstract

Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg’s critique of the ECB’s crisis response is misguided and that his proposal to deepen and reinforce the ECBs role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg’s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.

Keywords: Central banks, collateral policy, fiscal disciplining, financial stability, haircuts.

JEL Classification: E42, E58, F45

Suggested Citation

Vestergaard, Jakob and Gabor, Daniela, Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy (December 1, 2021). Institute for New Economic Thinking Working Paper Series No. 170, Available at SSRN: https://ssrn.com/abstract=3980953

Jakob Vestergaard (Contact Author)

Roskilde University - Department of Social Sciences and Business ( email )

Universitetsvej 1
P.O. Box 260
Roskilde, DK-4000
Denmark

Daniela Gabor

University of the West of England (UWE) ( email )

Blackberry Hill Bristol
West Bristol
Bristol, Avon BS16 1QY
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
126
Abstract Views
514
Rank
469,482
PlumX Metrics