Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy

Jakob Vestergaard () and Daniela Gabor
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Jakob Vestergaard: Roskilde University
Daniela Gabor: University of West England

No inetwp170, Working Papers Series from Institute for New Economic Thinking

Abstract: Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg`s critique of the ECB`s crisis response is misguided and that his proposal to deepen and reinforce the ECBs role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg`s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.

Keywords: Central banks; collateral policy; fiscal disciplining; financial stability; haircuts. (search for similar items in EconPapers)
JEL-codes: E42 E58 F45 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2021-12-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp170

DOI: 10.36687/inetwp170

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