The Collateral Channel of Open Market Operations
52 Pages Posted: 25 May 2016 Last revised: 12 Oct 2016
Date Written: May 1, 2016
We build a model of collateral choice by banks to quantify how changes in the haircut policy of the central bank affect the collateral used by banks and the funding cost of banks. We estimate the model using data on assets pledged to the European Central Bank from 2009 to 2011. Our results suggest for example that a 5% higher haircut on low rated collateral would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period.
Keywords: Collateral, Haircut, Central Bank, Money Market
JEL Classification: E52, E58, G01, F36
Suggested Citation: Suggested Citation