Rehypothecation and liquidity

David Andolfatto (), Fernando Martin and Shengxing Zhang

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets. Rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed. The liquidity benefits associated with rehypothecation are shown to be more important in high-inflation (high interest rate) regimes. Regulations restricting the practice are shown to have very different consequences depending on how they are designed. Assigning collateral to segregated accounts, as prescribed in the Dodd-Frank Act, is generally welfare-reducing. In contrast, an SEC15c3-3 type regulation can improve welfare through the regulatory premium it confers on cash holdings, which are inefficiently low when interest rates and inflation are high

Keywords: Rehypothecation; Money; Collateral; credit relationship (search for similar items in EconPapers)
JEL-codes: F3 G3 N0 (search for similar items in EconPapers)
Date: 2017-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published in European Economic Review, 1, November, 2017, 100, pp. 488-505. ISSN: 0014-2921

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http://eprints.lse.ac.uk/84558/ Open access version. (application/pdf)

Related works:
Journal Article: Rehypothecation and liquidity (2017)
Working Paper: Rehypothecation and Liquidity (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:84558

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