The role of collateral requirements in the crisis: one tool for two objectives?
AbstractThe implications of central bank collateral requirements for the monetary policy transmission mechanism and the working of the money market have often been neglected. Such implications, however, have clearly manifested during the course of the 2007-2009 crisis. As liquidity was vanishing in the interbank market, banks used (and abused of) central bank funding more intensively, in order to cover their financing needs. As a result, central bank collateral eligibility criteria have become even more critical than the policy rate as a factor of monetary policy transmission as well as a driver of liquidity in the interbank market. Thus, in the light of a retrospective analysis of some major events affecting monetary policy in the Euro area in the last two years, this study intends to properly reformulate the problem related to the choice of ?optimal? collateral requirements, by illustrating their interrelations with other central bank policy tools and targets. Ultimately, this approach allows us to derive a non-exhaustive set of recommendations for collateral and interest rate policies, as well as for central banks? exit strategies from the current unconventional measures.
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Bibliographic InfoPaper provided by Central Bank of Luxembourg in its series BCL working papers with number 44.
Length: 84 pages
Date of creation: Feb 2010
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Web page: http://www.bcl.lu/
Collateral; Monetary policy; Central bank; Interbank market; Financial stability;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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