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Two Monetary Tools: Interest Rates and Haircuts

In: NBER Macroeconomics Annual 2010, Volume 25

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  • Adam Ashcraft
  • Nicolae Gârleanu
  • Lasse Heje Pedersen

Abstract

We study a production economy with multiple sectors financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction of the interest rate can increase the required return of high-haircut assets since it can increase the shadow cost of capital for constrained agents. The required return can be lowered by easing funding constraints through lowering haircuts. To assess empirically the power of the haircut tool, we study the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). By considering unpredictable rejections of bonds from TALF, we estimate that haircuts had a significant effect on prices. Further, unique survey evidence suggests that lowering haircuts could reduce required returns by more than 3% and provides broader evidence on the demand sensitivity to haircuts.

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This chapter was published in:

  • Daron Acemoglu & Michael Woodford, 2011. "NBER Macroeconomics Annual 2010, Volume 25," NBER Books, National Bureau of Economic Research, Inc, number acem10-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12039.

    Handle: RePEc:nbr:nberch:12039

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    1. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    2. Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010. "Financial intermediation, asset prices, and macroeconomic dynamics," Staff Reports 422, Federal Reserve Bank of New York.
    3. Vasco Cúrdia & Michael Woodford, 2009. "Credit frictions and optimal monetary policy," BIS Working Papers 278, Bank for International Settlements.
    4. Repullo, Rafael & Suarez, Javier, 2000. "Entrepreneurial moral hazard and bank monitoring: A model of the credit channel," European Economic Review, Elsevier, vol. 44(10), pages 1931-1950, December.
    5. Daniele Coen-Pirani, 2000. "Margin Requirements and Equilibrium Asset Prices," GSIA Working Papers 2001-E5, Carnegie Mellon University, Tepper School of Business.
    6. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005. "Over-the-Counter Markets," Econometrica, Econometric Society, vol. 73(6), pages 1815-1847, November.
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