The Liquidity Coverage Ratio and security prices

Abstract

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Exit strategies for monetary policy

“…Under full …scal support, we assume that the real transfer to the public T adjusts endogenously to satisfy the consolidated government budget constraint (19) and that the rate of in ‡ation is kept constant at the calibrated value. For example, when changing d , we take into account the direct e¤ect of d on T and the general equilibrium e¤ects of d on T via changes in and " 1 .…”

“…All simulations in this section have the same initial conditions: The initial stock of reserves is M = 66, which corresponds to the average stock of reserves in 2013, and the initial in ‡ation rate is at the calibrated value = 1:01. Using these values, we …nd that the transfer that is needed to satisfy the consolidated government budget constraint (19) is T = 0:04. Recall that T is a lump-sum transfer.…”

“…Thus, full …scal support implicitly assumes that any change in policy results in a change of a non-distortionary tax. In contrast, under no …scal support, T is kept at the calibrated value, and the in ‡ation rate, which is a distortionary tax, adjusts to a change in policy to satisfy (19).…”

“…Welfare is increasing because in ‡ation is decreasing. The mechanism at work can be understood by inspecting the consolidated budget constraint (19): A decrease in M increases the bonds-to-reserve ratio B. Endogenous variables such as and " 1 do not adjust enough to satisfy T = T . Accordingly, has to decrease until T = T .…”

Liquidity in the repo market

“…11 This subsection is based on the SNB's instruction sheet on collateral eligible for SNB repos (see Swiss National Bank (2016), Swiss National Bank (2004), and Fuhrer, Müller and Steiner (2017)).…”