Central bank liquidity provision and collateral quality

Francois Koulischer and Daan Struyven

Journal of Banking & Finance, 2014, vol. 49, issue C, 113-130

Abstract: Should central banks lend against low quality collateral? We characterize efficient central bank collateral policy in a model where a bank borrows from the interbank market or the central bank. Collateral has favorable incentive effects but is costly to transfer to lenders who value the collateral less because of imperfect collateral quality. We show that a fall in the quantity or the quality of the bank’s collateral can increase interest rates in the economy even with a constant policy rate. A looser central bank collateral policy can reduce the spread, alleviate the credit crunch and increase output.

Keywords: Collateral policy; Monetary policy; Liquidity requirements (search for similar items in EconPapers)
JEL-codes: E58 G01 G20 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:49:y:2014:i:c:p:113-130

DOI: 10.1016/j.jbankfin.2014.08.022

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