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Low Real Interest Rates, Collateral Misrepresentation, and Monetary Policy

Listed author(s):
  • Williamson, Stephen D.

    ()

    (Federal Reserve Bank of St. Louis)

A model is constructed in which households and banks have incentives to fake the quality of collateral. These incentive problems matter when collateral is scarce in the aggregate when real interest rates are low. Conventional monetary easing can exacerbate these problems, in that the misrepresentation of collateral becomes more pro table, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages may not be feasible, due to misrepresentation of asset quality. If feasible, central bank asset purchase programs work by circumventing suboptimal fi scal policy, not by mitigating incentive problems in asset markets. (Previously circulated under the title,"Central Bank Purchases of Private Assets.")

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2014-26.

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Length: 38 pages
Date of creation: 01 Oct 2014
Date of revision: 29 Aug 2014
Handle: RePEc:fip:fedlwp:2014-026
Note: Previously circulated under the title "Central Bank Purchases of Private Assets."
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  1. Geromichalos, Athanasios & Herrenbrueck, Lucas M. & Salyer, Kevin D., 2016. "A search-theoretic model of the term premium," Theoretical Economics, Econometric Society, vol. 11(3), September.
  2. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
  3. 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.
  4. Sanches, Daniel & Williamson, Stephen, 2010. "Money and credit with limited commitment and theft," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1525-1549, July.
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