Working Paper: NBER ID: w16337
Authors: Adam Ashcraft; Nicolae Grleanu; Lasse Heje Pedersen
Abstract: 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.
Keywords: Monetary Policy; Haircuts; Interest Rates; Capital Constraints; Business Cycles
JEL Codes: E32; E44; E5; G01; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lowering interest rates (E43) | Decreases required returns for low-haircut assets (G19) |
| Lowering interest rates (E43) | Increases required returns for high-haircut assets (G19) |
| Lowering haircuts (E43) | Eases funding constraints across all assets (G19) |
| Access to loans at lower haircuts (G21) | Increases bids significantly (D44) |
| Lowering haircuts (E43) | Lowers required returns (G19) |