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Two Monetary Tools: Interest-Rates and Haircuts

  • Nicolae B. Garleanu

    (University of California, Berkeley)

  • Lasse Heje Pedersen

    (New York University)

  • Adam B. Ashcraft

    (Federal Reserve Bank of New York)

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.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1102.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1102
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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