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Financial constraints and collateral crises

Author

Listed:
  • Luis Araujo

    (Michigan State University
    Sao Paulo School of Economics–FGV)

  • Bernardo Guimaraes

    (Sao Paulo School of Economics–FGV
    Centre for Macroeconomics (CFM))

  • Diego Rodrigues

    (University of Minnesota)

Abstract

Assessing the fundamental value of a wide range of asset-backed securities is costly. As aresult, these assets can become information insensitive, which allows them to be used as collateralin credit transactions. In this paper, we show that while it is true that information-insensitiveassets can play a liquidity role, the fact that they play this role reinforces their informationinsensitivity. This implies that the availability of alternative ways of financing can harm theliquidity role of assets, even if these alternatives are costly and not used in equilibrium. Thereason is that such options raise the asset’s sensitivity to information by increasing the relativeimportance of their fundamental value vis-a-vis their role as collateral

Suggested Citation

  • Luis Araujo & Bernardo Guimaraes & Diego Rodrigues, 2020. "Financial constraints and collateral crises," Discussion Papers 2007, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2007
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    More about this item

    Keywords

    Financial crises; Asset-backed securities; Opacity; Private money;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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