Can the Hybridity of Law and Finance Save Central Banking in a Zero-Lower Bound Recession? A Money and Legal View

Elham Saeidinezhad and Tatev Hovhannisyan

MPRA Paper from University Library of Munich, Germany

Abstract: As the U.S. experience revealed after the Global Financial Crisis (GFC), zero lower bound (ZLB) limits the Fed's capacity to stimulate the economy through conventional methods of monetary policy. The GFC provided a chance to advance unconventional tools to strengthen economic growth and reclaim financial stability. One of the aims of the existing unconventional tools has been to provide liquidity to the banks. To account for the dynamic reality of the financial ecosystem, we propose two new instruments through which the Fed targets nonbank securities dealers and debt issuers explicitly. By design, these tools should be used as last resort options. The first tool called the "Dealer Option" and functions by opening the Fed's balance sheet to securities dealers to increases liquidity in the market. The second tool, "Elastic Legal Policy," suggests relaxing legal constraints in debt securities contracts during the financial crisis to reduce debt issuers' default risks. Given the interconnectedness of balance sheets and cash flows as well as the role of securities dealers as market makers, the elastic legal policy and dealer option help reduce debtors' defaults and liquidity risk during a financial crisis.

Keywords: Financial Crisis; Financial Stability; Central Banking; Debt Securities (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G21 G23 G24 K0 K22 (search for similar items in EconPapers)
Date: 2019-12-19
New Economics Papers: this item is included in nep-cba, nep-law, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/97719/1/MPRA_paper_97719.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/98162/1/MPRA_paper_98162.pdf revised version (application/pdf)

Related works:
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:pra:mprapa:97719

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().