Default Risk and Collateral in the Absence of Commitment

Mills, David C.; Reed, Robert R.

doi:10.2139/ssrn.1148963

Cited by 11 publications

(30 citation statements)

References 26 publications

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“…First, regarding the lack of commitment and the use of collateral, Lacker [2], Rampini [3], and Kehoe and Levine [4] show that the use of collateral is a necessary part of a constrained efficient solution. They focus on the incentive role of collateral; however, they do not study the insurance role of collateral, which Mills and Reed [1] puts emphasis on.…”

Section: Related Literaturementioning

confidence: 99%

“…Moreover, these incentive constraints lead to a situation where the borrower is not insured against the idiosyncratic default shock to him. This paper extends Mills and Reed [1] by adding a shock to the lenders' consumption in the second period of their lives. Thanks to the collateral's role as insurance against the borrower's default, the lenders have the same money balances irrespective of the borrower's default, and thus they consume the same amount of goods in the second period of their lives.…”

Section: Introductionmentioning

confidence: 96%

“…We base our discussion on an extension of the model of Mills and Reed [1]. Their model resembles a repo contract, in which two roles of collateral arise endogenously in an optimal financial contract to mitigate strategic default by a borrower and to provide the insurance role for a lender.…”

Section: Introductionmentioning

confidence: 99%

“…Regarding the lack of commitment, Mills and Reed [1] assume that there is no public record keeping of agent histories and no repeated relationships between a borrower and a lender (and thus no use of punishment mechanisms to encourage a borrower to repay). They also assume that there is no enforcement technology by which collateral can be seized (and thus the collateralized lending should be viewed as a repo contract, because the borrower will need to buy back the collateral by paying money to the lender).…”

Section: Introductionmentioning

confidence: 99%

“…Mills and Reed [1] show that these incentive constraints give rise to the result that the amount of goods obtained by the lender will be the same whether the borrower is a productive agent (not subject to an idiosyncratic default shock) or an unproductive agent (subject to an idiosyncratic default shock). When the borrower is a productive agent, he repays his borrowings by means of fiat money.…”

Section: Introductionmentioning

confidence: 99%

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Nontraditional Monetary Policy in a Model of Default Risks and Collateral in the Absence of Commitment

Fujiki¹

2017

aeb

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We show that a central bank could improve the allocation of resources by delivering the defaulting party's collateral goods to those who consume the most quickly. We base our discussion on Mills and Reed [1]'s repo contract model, which shows that the consumption of the lender will be the same whether the borrower is a productive agent or an unproductive agent. We extend their model by considering shocks to the second period of lenders' lives, which force them to consume within an early stage of the second period of their lives. The shock could make the consumption of lenders vary depending on the timing of transactions in the goods market. We show that a central bank could make the consumption of lenders constant regardless of the timing of transactions in the goods market, and could achieve better resource allocation by using various nontraditional monetary policy tools.

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Section: Related Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 96%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Nontraditional Monetary Policy in a Model of Default Risks and Collateral in the Absence of Commitment

Fujiki¹

2017

aeb

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Liquidity and asset-market dynamics

Rocheteau

Wright

2013

Journal of Monetary Economics

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We study economies with an essential role for liquid assets in transactions. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic, and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset price trajectories that resemble bubbles growing and bursting. We also analyze endogenous private and public liquidity provision. Sometimes it is e¢ cient to have enough liquid assets to satiate demand; other times it is not.

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Repos, fire sales, and bankruptcy policy

Antinolfi

Carapella

Kahn

et al. 2015

Review of Economic Dynamics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe events from the 2007-2009 …nancial crisis have raised concerns that the failure of large …nancial institutions can lead to destabilizing …re sales of assets. The risk of …re sales is related to exemptions from bankruptcy's automatic stay provision enjoyed by a number of …nancial contracts, such as repo. An automatic stay prohibits collection actions by creditors against a bankrupt debtor or his property. It prevents a creditor from liquidating collateral of a defaulting debtor since collateral is a lien on the debtor's property. In this paper, we construct a model of repo transactions, and consider the e¤ects of changing the bankruptcy rule regarding the automatic stay on the activity in repo and real investment markets. We …nd that exempting repos from the automatic stay is bene…cial for creditors who that hold the borrowers'collateral. Although the exemption may increase the size of the repo market by enhancing the liquidity of collateral, it can also lead to subsequent damaging …re sales that are associated with reductions in real investment activity. Hence, policy makers face a trade-o¤ between the bene…ts of investment activity and the bene…ts of liquid markets for collateral.

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Default Risk and Collateral in the Absence of Commitment

Cited by 11 publications

References 26 publications

Nontraditional Monetary Policy in a Model of Default Risks and Collateral in the Absence of Commitment

Nontraditional Monetary Policy in a Model of Default Risks and Collateral in the Absence of Commitment

Liquidity and asset-market dynamics

Repos, fire sales, and bankruptcy policy

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