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Can Cross-Border Financial Markets Create Endogenously Good Collateral in a Crisis?

Author

Listed:
  • Makoto Saito

    (Professor, Faculty of Economics, Hitotsubashi University, 2-1, Naka, Kunitachi, Tokyo, 186-8601, Japan, phone: +81-42- 580-8807, fax: +81-42-580-8882 (E-mail: makoto@econ.hit-u.ac.jp))

  • Shiba Suzuki

    (Assistant Professor, Faculty of Economics, Meisei University)

  • Tomoaki Yamada

    (Associate Professor, School of Commerce, Meiji University)

Abstract

In this paper, we explore whether markets can create endogenously good collateral in a crisis by analyzing a simple exchange economy where a country-specific catastrophic shock is shared between two countries. To see this possibility, we examine whether the equilibrium achieved by the time-0 complete markets with solvency constraints can be recovered in the dynamically complete markets with collateral constraints. This paper demonstrates that it is possible to recover the time-0 equilibrium outcome in a sequential manner when pricing errors occur randomly in evaluating Lucas trees at a catastrophic event. Such stochastic components may be interpreted as a policy initiative to create good collateral and yield constrained efficient outcomes at crisis periods.

Suggested Citation

  • Makoto Saito & Shiba Suzuki & Tomoaki Yamada, 2010. "Can Cross-Border Financial Markets Create Endogenously Good Collateral in a Crisis?," IMES Discussion Paper Series 10-E-19, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:10-e-19
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    File URL: http://www.imes.boj.or.jp/research/papers/english/10-E-19.pdf
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    Cited by:

    1. Shigenori Shiratsuka & Wataru Takahashi & Yuki Teranishi & Kozo Ueda, 2010. "Future of Central Banking under Globalization: Summary of the 2010 International Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 28, pages 1-16, November.

    More about this item

    Keywords

    Solvency Constraints; Collateral Constraints; Dynamic Optimal Contract; Catastrophic Shocks;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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