Two Monetary Tools: Interest Rates and Haircuts

By Adam B. Ashcraft, Nicolae Gârleanu, Lasse Heje Pedersen. NBER macroeconomics annual, 2011

180 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/4a9dc0a3e2e40419fcaa4761e02777ef595ca07d

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Citations in the corpus

Leverage Aversion and Risk Parity (2012, methodology): “Our global stock market proxy was the MSCI World indices provided by MSCI.10 For bonds, we used the J.P. Morgan Global Government Bond Index series from Thomson Reuters Datastream.”
The Central-Bank Balance Sheet as an Instrument of Monetary Policy (2011, unknown): “In order for such an effect to exist, it is thought to suffice that private parties not be perfectly indifferent between the two types of assets; and there are all sorts of reasons why differences in the risky payoffs associated with different assets should make them not perfect substitutes, even in”
Greening monetary policy (2019, background): “A lower haircut increases the liquidity of the security and reduces the cost of capital for its issuer (Ashcraft et al., 2011).”
Margin-Based Asset Pricing and Deviations from the Law of One Price (2011, unknown): “Ashcraft, Gârleanu, and Pedersen (2010) also provide evidence that the TALF lending facility had an impact on the market prices of CMBS bonds in a way that is consistent with our model.”
A shadow rate New Keynesian model (2016, unknown): “One prominent example is the Federal Reserve’s Term Asset-Backed Securities Loan Facility, which has been assessed by, for example, Ashcraft et al. (2010) and Del Negro et al. (2016). Similar policies implemented by other central banks include the Eurosystem’s valuation haircuts and UK’s credit cont”
Betting Against Beta (2010, unknown): “The standard CAPM beta cannot explain the cross-section of unconditional stock returns (Fama and French (1992)) or conditional stock returns (Lewellen and Nagel (2006)).”
Financial Intermediation and Macroeconomic Analysis (2010, unknown): “In Cúrdia and Woodford (2010b), we assume costs of central-bank lending to the private sector that imply that under normal circumstances, it will not be optimal for the central bank to hold assets other than highly liquid Treasury securities on its balance sheet; but even so, central-bank lending…”
Bank Leverage Cycles (2017, unknown): “For the latter, the flow of dividends distributed to the household is given by Πjt = R A t ω Ajt−1 − B̄ j t−1 −N j t , (6)”
How Quantitative Easing Works: Evidence on the Refinancing Channel (2016, unknown): “Sarkar and Shrader (2010), Ashcraft et al. (2011), Hancock and Passmore (2011), Joyce et al. (2011), Swanson (2011, 2015), Stroebel and Taylor (2012), D’Amico and King (2013),”