Two Monetary Tools: Interest Rates and Haircuts / Adam Ashcraft, Nicolae Gârleanu, Lasse Heje Pedersen.

Format:

Book

Author/Creator:

Ashcraft, Adam.

Contributor:

National Bureau of Economic Research.

Gârleanu, Nicolae.

Pedersen, Lasse Heje.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16337.

NBER working paper series no. w16337

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Two Monetary Tools

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

We study a production economy with multiple sectors financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction of the interest rate can increase the required return of high-haircut assets since it can increase the shadow cost of capital for constrained agents. The required return can be lowered by easing funding constraints through lowering haircuts. To assess empirically the power of the haircut tool, we study the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). By considering unpredictable rejections of bonds from TALF, we estimate that haircuts had a significant effect on prices. Further, unique survey evidence suggests that lowering haircuts could reduce required returns by more than 3% and provides broader evidence on the demand sensitivity to haircuts.

Notes:

Print version record

September 2010.