Collateral fluctuations in a monetary economy

Abstract

This paper studies economy-wide fluctuations that occur endogenously in the presence of monetary and real assets. Using a standard monetary search model, we consider an economy in which agents can increase consumption, over and above what their liquid monetary asset holdings would allow, pledging real assets as collateral for monetary loans. It is shown that, if the liquidation value of real assets is below full market value, a stable cyclical equilibrium can emerge in consumption and capital around the unstable steady state. We also provide conditions for the existence of cycles of higher order, chaos and sunspot equilibria

Asymmetric Information in Frictional Markets for Liquidity: On the Non-Equivalence of Credit and Sale

“…Kocherlakota (2001) in his work uses collateral to enforce credit contracts and discourage lenders from default. Ferraris and Watanabe (2008) introduce collateral secured loans in a monetary economy, while Ferraris and Watanabe (2011) extend the given framework by introducing collateral fluctuations. Berentsen and Waller (2011) analyze the trade-off of liquidity constrained agents between selling assets and borrowing by comparing outside (selling) to inside (credit) bonds.…”

Turnover Liquidity and the Transmission of Monetary Policy

“…The estimate of 1 is about 2.4 in specifications (I)-(V), implying that a 1 pp increase in the policy rate reduces the return of a stock with average turnover by 2.4 pps on the day of the policy announcement. 23 Combined, the estimates of 1 and 4 in specifications (VI)-(IX) imply a stronger response of stock returns to the policy rate. For example, according to specification (IX) a 1 pp increase in the policy rate reduces the return of a stock with average turnover by 5.6 pps on the day of the policy announcement.…”

“…-(23), but using the daily turnover rate (averaged over all traded stocks), T I t , as dependent variable instead of the average stock return, R I t . The mean and standard deviation of T I t over the whole sample are 37.291 bps, and 8.52 bps, respectively.…”

Monetary Policy and Efficiency in Over-the-Counter Financial Trade

“…A non exhaustive list includes Geromichalos, Licari, and Suarez-Lledo (2007), Ferraris andWatanabe (2011), Jacquet andTan (2012), Nosal and Rocheteau (2013), Andolfatto and Martin (2013), Rocheteau and Wright (2013), Venkateswaran and Wright (2013), Andolfatto, Berentsen, and Waller (2014), Geromichalos, Lee, Lee, and Oikawa (2015), Han, Julien, Petursdottir, andWang (2016), andJohnson (2016). Lagos (2010) shows that a model in which assets can help agents facilitate trade in frictional markets can be key to rationalizing the equity premium puzzle.…”