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Asymmetric shocks in a currency union: The role of central bank collateral policy

Listed author(s):
  • F. Koulischer

Currency unions limit the ability of the central bank to use interest rate policy to accommodate asymmetric shocks. I show that collateral policy can serve to dampen asymmetric shocks in a currency area when these shocks also affect the collateral held by banks and when collateral portfolios of banks differ systematically across countries. In my model banks from 2 countries use collateral to borrow from the money market or a central bank that targets a level of interest rate (or investment) in each economy. The distressed bank may enter a “collateral crunch” regime where it is constrained in its access to funding due to a moral hazard problem. The central bank faces an heterogeneous transmission of its interest rate: a unit change in rate has a smaller effect on the economy rate of the distressed country. The central bank therefore sets a high interest rate which is well transmitted in the booming economy and relaxes the haircut on the collateral owned by the distressed bank.

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_554_2015.pdf
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Paper provided by Banque de France in its series Working papers with number 554.

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Length: 49 pages
Date of creation: 2015
Handle: RePEc:bfr:banfra:554
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Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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