The Monetary Policy Haircut Rule

Markus Althanns and Hans Gersbach

No 18228, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We present a monetary policy haircut rule, based on macro-financial fundamentals. In a dynamic two-sector economy, firms secure external financing through either bank loans or corporate bonds. Banks, in turn, depend on central-bank reserve loans, which they collateralize with bank loans and government bonds. The central bank imposes haircuts on this collateral, aiming to balance the efficient allocation of capital across sectors with bank-default costs. Calibrated to U.S. post-crisis data, our model identifies optimal bank-loan haircuts around 11%. The haircut rule mitigates bank-equity shocks through a collateral stabilization channel. Contrary to conventional wisdom, bank-equity holders benefit from large haircuts.

Keywords: Central bank; Haircuts; Collateral framework; Monetary policy (search for similar items in EconPapers)
JEL-codes: E42 E58 G21 (search for similar items in EconPapers)
Date: 2023-06
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