Rehypothecation and Liquidity

David Andolfatto (), Fernando Martin and Shengxing Zhang

No 2015-3, Working Papers from Federal Reserve Bank of St. Louis

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 relationships (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-02-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Note: The original title was "Rehypothecation"
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Rehypothecation and liquidity (2017)
Working Paper: Rehypothecation and liquidity (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2015-003

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DOI: 10.20955/wp.2015.003

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