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Journal of Banking & Finance Vol. 49 2014

Central bank liquidity provision and collateral quality

François Koulischer1,2,3; Daan Struyven4

1 Solvay (Belgium) · 2 Banque de France · 3 Université Libre de Bruxelles · 4 Massachusetts Institute of Technology

Abstract

Should central banks lend against low quality collateral? We characterize efficient central bank collateral policy in a model where a bank borrows from the interbank market or the central bank. Collateral has favorable incentive effects but is costly to transfer to lenders who value the collateral less because of imperfect collateral quality. We show that a fall in the quantity or the quality of the bank’s collateral can increase interest rates in the economy even with a constant policy rate. A looser central bank collateral policy can reduce the spread, alleviate the credit crunch and increase output.

DOI
10.1016/j.jbankfin.2014.08.022
Volume
49
Pages
113-130
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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