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The Impact Of Return On Collateral In A Channel System

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  • Enchuan Shao
  • Kwabena Bediako

Abstract

We empirically investigate the relationship between the return on collateral and monetary policy implementation in the channel system. Recent developments in monetary theory suggest that the return on government assets which measures the opportunity cost of holding collateral should have negative impacts on the interest‐rate spread and the interbank market rate. The central bank should set a higher spread when the return on collateral is below a cutoff but implements a lower spread when the return on collateral is higher than the cutoff. The interbank market rate tends to lie above the policy target rate when the return on collateral is low and vice versa. We use data from Eurozone area and six industrialized countries to test these theoretical implications. We propose two econometric models: one is more structural and closely related to the monetary model to test the negative relationships, and the other is based on the threshold autoregression model to detect the potential cutoffs. Our findings provide conditional support for the negative impact of return on collateral. (JEL E40, E52, E58)

Suggested Citation

  • Enchuan Shao & Kwabena Bediako, 2020. "The Impact Of Return On Collateral In A Channel System," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1314-1341, July.
    • Handle: RePEc:bla:ecinqu:v:58:y:2020:i:3:p:1314-1341
    DOI: 10.1111/ecin.12863
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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