The rationale for or against expanding central bank eligible collateral in times of distress

Jean-Paul Fitoussi

SciencePo Working papers Main from HAL

Abstract: The current crisis is testing the capacity of policy makers to give adequate answers to the possibility of a major financial meltdown. The crisis began in the subprime sector, a relatively small segment of the mortgage industry. It is thanks to an insufficiently regulated system of financial innovations that it spread to the balance sheets of all financial institutions around the world. The briefing paper does not deal with the issue of what regulatory framework we should design. It rather focuses on the short run policy response to the crisis. I will conclude that most of the burden in this specific moment falls on fiscal policy, monetary policy having reached a liquidity trap situation. Nevertheless, monetary policy still has an important role (that it played already in the past months) in providing liquidity to the markets, and in facilitating the task of fiscal policy. In this perspective, I agree with Anne Sibert's BP of March 2008, in considering appropriate a wider definition of acceptable collateral, to include also "troubled assets". This should be done in the short run, though, and a number of medium term consequences, notably on the coordination between strictly interconnected fiscal and monetary policies, should be evaluated.

Date: 2008-11
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Published in 2008

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Working Paper: The rationale for or against expanding central bank eligible collateral in times of distress (2008)
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