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Two Monetary Tools: Interest-Rates and Haircuts

Author

Listed:
  • Nicolae B. Garleanu

    (University of California, Berkeley)

  • Lasse Heje Pedersen

    (New York University)

  • Adam B. Ashcraft

    (Federal Reserve Bank of New York)

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 natural experiment of the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). We estimate that the TALF program reduced required returns by more than 0.70% using a triple difference-in-difference regression. Further, unique survey evidence suggests the effect could be more than 3% and provides broader evidence on the demand sensitivity to haircuts.

Suggested Citation

  • Nicolae B. Garleanu & Lasse Heje Pedersen & Adam B. Ashcraft, 2010. "Two Monetary Tools: Interest-Rates and Haircuts," 2010 Meeting Papers 1102, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:1102
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    More about this item

    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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