Open access
Date
2023-02-22Type
- Conference Paper
ETH Bibliography
yes
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Abstract
We embed a banking model, depicting the duality of private money creation and credit extension, into a two-sector neoclassical model with financial frictions. Banks rely on central-bank reserve loans that are collateralized according to the central bank's collateral framework. We derive optimal static and dynamic haircut rules, which balance the efficient allocation of capital across sectors and bank default costs. We offer a simple formula for haircuts that relies on four fundamental factors: liquidity demand, output elasticity of capital, production capacities in the bond-financed and loan-financed sectors, and capital-ownership shares. We calibrate the model to the US and find ranges for haircuts between 5% to 20% when we consider numerical scenarios for capital-ownership shares and productivity risk. Varying haircuts have also distributional effects: bondholders and workers may suffer from tight collateral requirements (large haircuts), while bankers benefit despite reduced leverage. Show more
Permanent link
https://doi.org/10.3929/ethz-b-000652072Publication status
publishedExternal links
Journal / series
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2023: Growth and the "sociale Frage"Publisher
ZBW - Leibniz Information Centre for EconomicsEvent
Subject
Central bank; haircut rule; Monetary policy; bank money creationOrganisational unit
03729 - Gersbach, Hans / Gersbach, Hans
Related publications and datasets
Is variant form of: http://hdl.handle.net/20.500.11850/649971
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ETH Bibliography
yes
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