IDEAS home Printed from https://ideas.repec.org/a/eee/jmacro/v30y2008i4p1723-1737.html
   My bibliography  Save this article

Scarce collateral and bank reserves

Author

Listed:
  • Faig, Miquel
  • Gagnon, Gregory

Abstract

If collateral for bank loans is scarce and, if as a result, access to secured loans is restricted, the allocation of resources is inefficient. In anticipation of future borrowing constraints, individuals over-invest in collateralized types of capital, and consume and invest inefficiently low levels while they are borrowing constrained. The dual counterpart of this misallocation of resources is inefficiently low interest rates. In this situation, bank reserves play a positive welfare role by adding liquidity to the economy and by increasing not only bank lending rates, but also, paradoxically, bank deposit rates. As a result, in economies with scarce collateral the optimal reserves-requirement ratio is positive.

Suggested Citation

  • Faig, Miquel & Gagnon, Gregory, 2008. "Scarce collateral and bank reserves," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1723-1737, December.
    • Handle: RePEc:eee:jmacro:v:30:y:2008:i:4:p:1723-1737
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0164-0704(08)00038-4
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-1504, September.
    2. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    3. Faig, Miquel, 2000. "The Optimal Structure of Liquidity Provided by a Self-Financed Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 746-765, November.
    4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    5. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    6. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
    7. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-388, May.
    8. Diaz-Gimenez, Javier & Prescott, Edward C. & Fitzgerald, Terry & Alvarez, Fernando, 1992. "Banking in computable general equilibrium economies," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 533-559.
    9. Duncan K. Foley & Martin F. Hellwig, 1975. "Asset Management with Trading Uncertainty," Review of Economic Studies, Oxford University Press, vol. 42(3), pages 327-346.
    10. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
    11. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
    2. Gersbach, Hans & Rochet, Jean Charles & von Thadden, Ernst-Ludwig, 2022. "Public Debt and the Balance Sheet of the Private Sector," CEPR Discussion Papers 17529, C.E.P.R. Discussion Papers.
    3. Edouard Challe & Xavier Ragot, 2011. "Fiscal Policy in a Tractable Liquidity‐Constrained Economy," Economic Journal, Royal Economic Society, vol. 121(551), pages 273-317, March.
    4. Toda, Alexis Akira, 2019. "Wealth distribution with random discount factors," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 101-113.
    5. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, December.
    6. repec:hal:spmain:info:hdl:2441/6bl2553ksc9vlq1fltjs9h1cht is not listed on IDEAS
    7. Acikgoz, Omer, 2013. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 50160, University Library of Munich, Germany.
    8. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October.
    9. François Le Grand & Xavier Ragot, 2017. "Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks," Sciences Po Economics Discussion Papers 2017-03, Sciences Po Departement of Economics.
    10. François Le Grand & Xavier Ragot, 2023. "Should we increase or decrease public debt? Optimal fiscal policy with heterogeneous agents," SciencePo Working papers Main halshs-03922359, HAL.
    11. repec:hal:wpspec:info:hdl:2441/6bl2553ksc9vlq1fltjs9h1cht is not listed on IDEAS
    12. Domeij, David & Ellingsen, Tore, 2015. "Rational Bubbles and Economic Crises: A Quantitative Analysis," SSE Working Paper Series in Economics 2015:1, Stockholm School of Economics.
    13. Edouard Challe & Xavier Ragot, 2007. "Public spending shocks in a liquidity-constrained economy," PSE Working Papers halshs-00587686, HAL.
    14. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    15. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1245-1269, September.
    16. repec:hal:spmain:info:hdl:2441/22sqasvlo496gr515iea84b26f is not listed on IDEAS
    17. Faig, Miquel, 2000. "The Optimal Structure of Liquidity Provided by a Self-Financed Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 746-765, November.
    18. António Antunes & Tiago Cavalcanti & Anne Villamil, 2010. "Intermediation Costs and Welfare," Centre for Growth and Business Cycle Research Discussion Paper Series 142, Economics, The University of Manchester.
    19. Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions -super-1," CESifo Economic Studies, CESifo, vol. 56(4), pages 627-648, December.
    20. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    21. Antonio Antunes & Valerio Ercolani, 2020. "Public debt expansions and the dynamics of the household borrowing constraint," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 1-32, July.
    22. Acikgoz, Omer, 2015. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 73380, University Library of Munich, Germany.
    23. repec:hal:spmain:info:hdl:2441/6ailptt35p9f2oi4vdhvki7q7n is not listed on IDEAS
    24. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2004. "Smoothing sudden stops," Journal of Economic Theory, Elsevier, vol. 119(1), pages 104-127, November.

    More about this item

    Keywords

    Liquidity Borrowing constraints Collateral Banking Reserves;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:30:y:2008:i:4:p:1723-1737. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622617 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.