Scarce collateral and bank reserves

Miquel Faig () and Gregory Gagnon

Journal of Macroeconomics, 2008, vol. 30, issue 4, pages 1723-1737

Abstract: If collateral for bank loans is scarce and, if as a result, access to secured loans is restricted, the allocation of resources is inefficient. In anticipation of future borrowing constraints, individuals over-invest in collateralized types of capital, and consume and invest inefficiently low levels while they are borrowing constrained. The dual counterpart of this misallocation of resources is inefficiently low interest rates. In this situation, bank reserves play a positive welfare role by adding liquidity to the economy and by increasing not only bank lending rates, but also, paradoxically, bank deposit rates. As a result, in economies with scarce collateral the optimal reserves-requirement ratio is positive.

Keywords: Liquidity; Borrowing; constraints; Collateral; Banking; Reserves (search for similar items in EconPapers)
Date: 2008

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Working Paper: Scarce Collateral and Bank Reserves (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jmacro:v:30:y:2008:i:4:p:1723-1737

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