American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Low Real Interest Rates, Collateral Misrepresentation, and Monetary Policy
American Economic Journal: Macroeconomics
vol. 10,
no. 4, October 2018
(pp. 202–33)
Abstract
A model is constructed in which households and banks have incentives to fake the quality of collateral. These incentive problems matter when collateral is scarce in the aggregate—when real interest rates are low. Conventional monetary easing can exacerbate these problems, in that the misrepresentation of collateral becomes more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages may not be feasible, due to misrepresentation of asset quality. If feasible, central bank asset purchase programs work by circumventing suboptimal fiscal policy, not by mitigating incentive problems in asset markets.Citation
Williamson, Stephen D. 2018. "Low Real Interest Rates, Collateral Misrepresentation, and Monetary Policy." American Economic Journal: Macroeconomics, 10 (4): 202–33. DOI: 10.1257/mac.20150035Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- E62 Fiscal Policy
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
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