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Two Monetary Tools: Interest Rates and Haircuts

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  • Ashcraft, Adam
  • Garleanu, Nicolae Bogdan
  • Pedersen, Lasse Heje

Abstract

We study a production economy with multiple sectors financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction of the interest rate can increase the required return of high-haircut assets since it can increase the shadow cost of capital for constrained agents. The required return can be lowered by easing funding constraints through lowering haircuts. To assess empirically the power of the haircut tool, we study the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). By considering unpredictable rejections of bonds from TALF, we estimate that haircuts had a significant effect on prices. Further, unique survey evidence suggests that lowering haircuts could reduce required returns by more than 3% and provides broader evidence on the demand sensitivity to haircuts.

Suggested Citation

  • Ashcraft, Adam & Garleanu, Nicolae Bogdan & Pedersen, Lasse Heje, 2010. "Two Monetary Tools: Interest Rates and Haircuts," CEPR Discussion Papers 8000, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8000
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    References listed on IDEAS

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    More about this item

    Keywords

    asset pricing; financial frictions; haircuts; liquidity; macroeconomics; margin requirements; monetary policy;
    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
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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