Working Paper: CEPR ID: DP18228
Authors: Markus Althanns; Hans Gersbach
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, bank leverage, and productivity risk. Varying haircuts have also distributional effects: bondholders and workers may suffer from tight collateral requirements (large haircuts), while bankers benefit despite reducedleverage.
Keywords: Central Bank Haircuts; Monetary Policy; Money Creation; Monetary System
JEL Codes: E42; E50; E51; E52; E58; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower haircut (Y60) | higher output levels (E23) |
| bank ownership structure (G21) | optimal haircut increases (C61) |
| tighter collateral requirements (G28) | reduced liquidity (G33) |
| tighter collateral requirements (G28) | increased bank insolvency risk (G21) |
| haircut policies (J78) | economic stability (E63) |
| varying haircuts (F31) | distributional effects (D39) |