Costly Collateral and the Public Supply of Liquidity

Author/Editor:

Philip Schellekens

Publication Date:

July 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper addresses two complications arising from the use of collateral requirements in debt contracts between wealth-constrained entrepreneurs and banks. First, costly asset liquidation is found to enhance the susceptibility of debt finance to interest rate volatility. Second, aggregate uncertainty in conjunction with limited bank capitalization is shown to produce excessive credit constraints that, under certain conditions, justify the public supply of liquidity. The paper suggests applications with respect to models of interest rate smoothing and self-fulfilling currency crises.

Series:

Working Paper No. 2000/125

Subject:

Asset prices Banking Collateral Credit Financial institutions Labor Loans Money Prices Self-employment

English

Publication Date:

July 1, 2000

ISBN/ISSN:

9781451854817/1018-5941

Stock No:

WPIEA1252000

Pages:

24

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