Collateral framework: liquidity premia and multiple equilibria
- Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. The authors show how such features in a central bank’s collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.
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| Author: | Yvan LengwilerORCiDGND, Athanasios OrphanidesORCiDGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-564548 |
| URL: | https://www.imfs-frankfurt.de/forschung/imfs-working-papers/details/publication/collateral-frameworkliquidity-premia-and-multiple-equilibria.html |
| Parent Title (English): | Working paper series / Institute for Monetary and Financial Stability ; 157 |
| Series (Serial Number): | Working paper series / Institute for Monetary and Financial Stability (157) |
| Publisher: | Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2021 |
| Year of first Publication: | 2021 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2021/07/30 |
| Tag: | cliff effect; collateral; default premium; government finance; liquidity premium; monetary policy; multiple equilibria; yields |
| Issue: | April 2021 |
| Page Number: | 37 |
| HeBIS-PPN: | 485410974 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
