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The Monetary Policy Haircut Rule

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  • Althanns, Markus
  • Gersbach, Hans

Abstract

We present a monetary policy haircut rule, based on macro-financial fundamentals. In a dynamic two-sector economy, firms secure external financing through either bank loans or corporate bonds. Banks, in turn, depend on central-bank reserve loans, which they collateralize with bank loans and government bonds. The central bank imposes haircuts on this collateral, aiming to balance the efficient allocation of capital across sectors with bank-default costs. Calibrated to U.S. post-crisis data, our model identifies optimal bank-loan haircuts around 11%. The haircut rule mitigates bank-equity shocks through a collateral stabilization channel. Contrary to conventional wisdom, bank-equity holders benefit from large haircuts.

Suggested Citation

  • Althanns, Markus & Gersbach, Hans, 2023. "The Monetary Policy Haircut Rule," CEPR Discussion Papers 18228, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:18228
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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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