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

Author

Listed:
  • Jakob Vestergaard

    (Roskilde University)

  • Daniela Gabor

    (University of West England)

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.

Suggested Citation

  • Jakob Vestergaard & Daniela Gabor, 2021. "Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy," Working Papers Series inetwp170, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp170
    DOI: 10.36687/inetwp170
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    File URL: https://doi.org/10.36687/inetwp170
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    References listed on IDEAS

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    Cited by:

    1. Betz, Timm & Pond, Amy, 2023. "Democratic institutions and regulatory privileges for government debt," European Journal of Political Economy, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Central banks; collateral policy; fiscal disciplining; financial stability; haircuts.;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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