The Monetary Policy Haircut Rule

Markus Althanns and Hans Gersbach

No 18228, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We embed a banking model, depicting the duality of private money creation and credit extension, into a two-sector neoclassical model with financial frictions. Banks rely on central-bank reserve loans that are collateralized according to the central bank's collateral framework. We derive optimal static and dynamic haircut rules, which balance the efficient allocation of capital across sectors and bank-default costs. We offer a simple formula for haircuts that relies on four fundamental factors: liquidity demand, output elasticity of capital, production capacities in the bond-financed and loan-financed sectors, and capital-ownership shares. We calibrate the model to the US and find ranges for haircuts between 5% to 20% when we consider numerical scenarios for capital-ownership shares, bank leverage, and productivity risk. Varying haircuts have also distributional effects: bondholders and workers may suffer from tight collateral requirements (large haircuts), while bankers benefit despite reduced leverage.

Keywords: Central bank; Haircuts; Monetary policy; Money creation; Monetary system (search for similar items in EconPapers)
JEL-codes: E42 E50 E51 E52 E58 G21 (search for similar items in EconPapers)
Date: 2023-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18228 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: The Monetary Policy Haircut Rule (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:18228

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18228

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().