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Scarce collateral and bank reserves

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  • Faig, Miquel
  • Gagnon, Gregory

Abstract

If collateral for bank loans is scarce and, if as a result, access to secured loans is restricted, the allocation of resources is inefficient. In anticipation of future borrowing constraints, individuals over-invest in collateralized types of capital, and consume and invest inefficiently low levels while they are borrowing constrained. The dual counterpart of this misallocation of resources is inefficiently low interest rates. In this situation, bank reserves play a positive welfare role by adding liquidity to the economy and by increasing not only bank lending rates, but also, paradoxically, bank deposit rates. As a result, in economies with scarce collateral the optimal reserves-requirement ratio is positive.

Suggested Citation

  • Faig, Miquel & Gagnon, Gregory, 2008. "Scarce collateral and bank reserves," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1723-1737, December.
  • Handle: RePEc:eee:jmacro:v:30:y:2008:i:4:p:1723-1737
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    References listed on IDEAS

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    More about this item

    Keywords

    Liquidity Borrowing constraints Collateral Banking Reserves;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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