Central bank haircut policy
We 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.
(This abstract was borrowed from another version of this item.)
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.:
- Aleksander Berentsen & Cyril Monnet, 2008.
"Monetary policy in a channel system,"
08-7, Federal Reserve Bank of Philadelphia.
- Aleksander Berentsen & Cyril Monnet, 2007. "Monetary Policy in a Channel System," CESifo Working Paper Series 1929, CESifo Group Munich.
- Aleksander Berentsen & Cyril Monet, 2006. "Monetary Policy in a Channel System," IEW - Working Papers 295, Institute for Empirical Research in Economics - University of Zurich.
- Jeffrey Lacker, 2001.
"Collateralized Debt as the Optimal Contract,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 842-859, October.
- Jeffrey Lacker, 2001. "Online Appendix to Collateralized Debt as the Optimal Contract," Technical Appendices lacker01, Review of Economic Dynamics.
- Jeffrey M. Lacker, 1998. "Collateralized debt as the optimal contract," Working Paper 98-04, Federal Reserve Bank of Richmond.
- 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, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
- Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
- 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.
- Martin, Antoine & Monnet, Cyril, 2011.
"Monetary Policy Implementation Frameworks: A Comparative Analysis,"
Cambridge University Press, vol. 15(S1), pages 145-189, April.
- Antoine Martin & Cyril Monnet, 2008. "Monetary policy implementation frameworks: a comparative analysis," Staff Reports 313, Federal Reserve Bank of New York.
- Antoine Martin & Cyril Monnet, 2009. "Monetary policy implementation frameworks: a comparative analysis," Working Papers 09-27, Federal Reserve Bank of Philadelphia.
- 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.
- 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.
- Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2006.
"A Dynamic Model of Settlement,"
1053, Queen's University, Department of Economics.
- ANTOINE MARTIN & JAMES McANDREWS, 2010.
"Should There Be Intraday Money Markets?,"
Contemporary Economic Policy,
Western Economic Association International, vol. 28(1), pages 110-122, 01.
When requesting a correction, please mention this item's handle: RePEc:kap:annfin:v:7:y:2011:i:3:p:319-348. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.