Repos, fire sales, and bankruptcy policy

Antinolfi, Gaetano; Carapella, Francesca; Kahn, Charles M.; Martin, Antoine; Mills, David C.; Nosal, Ed

doi:10.1016/j.red.2014.06.002

Cited by 17 publications

(2 citation statements)

References 10 publications

(3 reference statements)

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“…As in Rocheteau et al (2018), we do not propose a deep theory of repurchase agreements (repos). We refer to Antinolfi et al (2015) or Gottardi, Maurin, and Monnet (2019) for more on repos.…”

Section: Fiscal Authoritymentioning

confidence: 99%

Normalizing the Central Bank's Balance Sheet: Implications for Inflation and Debt Dynamics

Domínguez¹,

Gomis‐Porqueras²

2022

J of Money Credit Banking

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We explore the effects of reducing the overall size of the central bank's balance sheet and lowering its maturity structure. To do so, we consider an environment where fiscal policy is traditionally passive and the central bank follows the Taylor principle. In addition, the monetary authority has also explicit size and compositional rules regarding its balance sheet. Agents in this economy face limited commitment in some markets and government bonds can be used as collateral. When short-and long-term public debt exhibit premia, changes in the central bank's balance sheet have implications for long-run inflation and real allocations. To ensure a unique locally stable steady state, the central bank should target a low enough maturity composition of its balance sheet. In our numerical exercise, calibrated to the United States, we find that long-term debt holdings by the central bank should be less than 0.5 times of their short-term positions. Moreover, the process of balance sheet normalization should aggressively respond to the total debt issued in the economy relative to its target. These findings depend on the degree of liquidity of long-term bonds. The more liquid long-term bonds are, the lower is the value of the composition threshold and the parameter space consistent with unique and stable equilibria is smaller. In addition, we consider a modified Taylor rule that takes into account the premium. Such a rule increases the prevalence of multiplicity of steady states and deliversWe would like to thank Jonathan Chiu, Bruce Preston, Guillaume Rocheteau, and Michael Choi for their feedback. We would also like to thank the referee and editor for their comments and suggestions.

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Section: Fiscal Authoritymentioning

confidence: 99%

Normalizing the Central Bank's Balance Sheet: Implications for Inflation and Debt Dynamics

Domínguez¹,

Gomis‐Porqueras²

2022

J of Money Credit Banking

View full text Add to dashboard Cite

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“…Relevant papers in this literature include Antinolfi, Carapella, Kahn, Martin, Mills, and Nosal (2014), Bliss and Kaufman (2006), Duffie and Skeel (2006), Edwards and Morrison (2005), Lubben (2009), Roe (2011), and Skeel and Jackson (2012. Notably, Bolton and Oehmke (2014) bring a corporate finance model to bear on the question of bankruptcy seniority, but they focus on the exemptions for derivatives.…”

Section: Related Literaturementioning

confidence: 99%

Resaleable debt and systemic risk

Donaldson

Micheler

2018

Journal of Financial Economics

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Many debt claims, such as bonds, are resaleable, whereas others, such as repos, are not. There was a fivefold increase in repo borrowing before the 2008 crisis. Why? Did banks' dependence on non-resaleable debt precipitate the crisis? In this paper, we develop a model of bank lending with credit frictions. The key feature of the model is that debt claims are heterogeneous in their resaleability. We find that decreasing credit market frictions leads to an increase in borrowing via non-resaleable debt. Borrowing via non-resaleable debt has a dark side: it causes credit chains to form, since if a bank makes a loan via non-resaleable debt and needs liquidity, it cannot sell the loan but must borrow via a new contract. These credit chains are a source of systemic risk, since one bank's default harms not only its creditors but also its creditors' creditors. Overall, our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions. This paper is published as part of the Systemic Risk Centre's Discussion Paper Series. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. Did banks' dependence on non-resaleable debt precipitate the crisis? In this paper, we develop a model of bank lending with credit frictions. The key feature of the model is that debt claims are heterogenous in their resaleability. We find that decreasing credit market frictions leads to an increase in borrowing via non-resaleable debt. Borrowing via non-resaleable debt has a dark side: it causes credit chains to form, since if a bank makes a loan via non-resaleable debt and needs liquidity, it cannot sell the loan but must borrow via a new contract. These credit chains are a source of systemic risk, since one bank's default harms not only its creditors but also its creditors' creditors. Overall, our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions.

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