Central Bank Haircut Policy
AbstractWe present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 10-23.
Length: 44 pages
Date of creation: 2010
Date of revision:
Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Payment; clearing; and settlement systems; Central bank research; Monetary policy implementation; Financial system regulation and policies; Financial services;
Other versions of this item:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-16 (All new papers)
- NEP-BAN-2010-10-16 (Banking)
- NEP-CBA-2010-10-16 (Central Banking)
- NEP-MAC-2010-10-16 (Macroeconomics)
- NEP-MON-2010-10-16 (Monetary Economics)
- NEP-REG-2010-10-16 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bhattacharya, Joydeep & Haslag, Joseph H. & Martin, Antoine, 2009.
"Why does overnight liquidity cost more than intraday liquidity?,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(6), pages 1236-1246, June.
- Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2007. "Why does overnight liquidity cost more than intraday liquidity?," Staff Reports 281, Federal Reserve Bank of New York.
- Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2007. "Why Does Overnight Liquidity Cost More Than Intraday Liquidity?," Staff General Research Papers 13096, Iowa State University, Department of Economics.
- Antoine Martin & James McAndrews, 2008.
"Should there be intraday money markets?,"
337, Federal Reserve Bank of New York.
- Jeffrey Lacker, 2001.
"Online Appendix to Collateralized Debt as the Optimal Contract,"
lacker01, Review of Economic Dynamics.
- Ricardo Lagos & Randall Wright, 2005.
"A Unified Framework for Monetary Theory and Policy Analysis,"
Journal of Political Economy,
University of Chicago Press, vol. 113(3), pages 463-484, June.
- Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
- Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
- James T. E. Chapman & Antoine Martin, 2007.
"Rediscounting under aggregate risk with moral hazard,"
296, Federal Reserve Bank of New York.
- James T.E. Chapman & Antoine Martin, 2013. "Rediscounting under Aggregate Risk with Moral Hazard," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 651-674, 06.
- James T. E. Chapman & Antoine Martin, 2007. "Rediscounting Under Aggregate Risk with Moral Hazard," Working Papers 07-51, Bank of Canada.
- Aleksander Berentsen & Cyril Monnet, 2007.
"Monetary Policy in a Channel System,"
CESifo Working Paper Series
1929, CESifo Group Munich.
- Aleksander Berentsen & Cyril Monnet, 2008. "Monetary policy in a channel system," Working Papers 08-7, Federal Reserve Bank of Philadelphia.
- Aleksander Berentsen & Cyril Monet, 2006. "Monetary Policy in a Channel System," IEW - Working Papers 295, Institute for Empirical Research in Economics - University of Zurich.
- Antoine Martin & Cyril Monnet, 2008.
"Monetary policy implementation frameworks: a comparative analysis,"
313, Federal Reserve Bank of New York.
- Martin, Antoine & Monnet, Cyril, 2011. "Monetary Policy Implementation Frameworks: A Comparative Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S1), pages 145-189, April.
- Antoine Martin & Cyril Monnet, 2009. "Monetary policy implementation frameworks: a comparative analysis," Working Papers 09-27, Federal Reserve Bank of Philadelphia.
- Koeppl, Thorsten Volker & Monnet, Cyril & Temzelides, Ted, 2006.
"A dynamic model of settlement,"
Working Paper Series
0604, European Central Bank.
- Jeffrey M. Lacker, 1998.
"Collateralized debt as the optimal contract,"
98-04, Federal Reserve Bank of Richmond.
- Aleksander Berentsen & Alessandro Marchesiani & Christopher Waller, .
"Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics.
- Aleksander Berentsen & Alessandro Marchesiani & Christopher J. Waller, 2013. "Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic," ECON - Working Papers 121, Department of Economics - University of Zurich, revised Sep 2013.
- Bindseil, Ulrich & Jabłecki, Juliusz, 2013. "Central bank liquidity provision, risk-taking and economic efficiency," Working Paper Series 1542, European Central Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.