TY - JOUR
T1 - Re-use of collateral
T2 - Leverage, volatility, and welfare
AU - Brumm, Johannes
AU - Grill, Michael
AU - Kubler, Felix
AU - Schmedders, Karl
N1 - Funding Information:
We thank audiences at Boston University, the ECB, the 2016 EEA Meeting in Geneva, the University of Zurich, the City University of Hong Kong, the 2nd International Conference on Financial Markets and Macroeconomic Performance in Frankfurt, the 2017 SED conference, Queen Mary University of London, the University of Heidelberg, the Verein für Socialpolitik, the 2nd Research Conference of the Macroeconomic Modelling and Model Comparison Network at Stanford, the 2019 CEBRA Annual Meeting, the 2nd Conference on Non-bank Financial Institutions and Financial Stability at LSE, and the 2020 World Congress of the Econometric Society for helpful comments. We are grateful to our discussants Georgy Chabakauri, Hanno Lustig, Ctirad Slavik, and Alexandros Vardoulakis as well as Sebastian Infante, Larry Kotlikoff, Sydney Ludvigson, and Harald Uhlig for detailed remarks. We thank two anonymous referees and the Editor, Matteo Iacoviello, for helpful feedback on an earlier draft. We are indebted to Dave Brooks for excellent editorial help. Felix Kubler gratefully acknowledges the financial support of Swiss Finance Institute . Johannes Brumm and Felix Kubler acknowledge the support of the ERC . The opinions expressed in this paper are those of the authors and should not be regarded as those of the European Central Bank or the Eurosystem.
Funding Information:
We thank audiences at Boston University, the ECB, the 2016 EEA Meeting in Geneva, the University of Zurich, the City University of Hong Kong, the 2nd International Conference on Financial Markets and Macroeconomic Performance in Frankfurt, the 2017 SED conference, Queen Mary University of London, the University of Heidelberg, the Verein für Socialpolitik, the 2nd Research Conference of the Macroeconomic Modelling and Model Comparison Network at Stanford, the 2019 CEBRA Annual Meeting, the 2nd Conference on Non-bank Financial Institutions and Financial Stability at LSE, and the 2020 World Congress of the Econometric Society for helpful comments. We are grateful to our discussants Georgy Chabakauri, Hanno Lustig, Ctirad Slavik, and Alexandros Vardoulakis as well as Sebastian Infante, Larry Kotlikoff, Sydney Ludvigson, and Harald Uhlig for detailed remarks. We thank two anonymous referees and the Editor, Matteo Iacoviello, for helpful feedback on an earlier draft. We are indebted to Dave Brooks for excellent editorial help. Felix Kubler gratefully acknowledges the financial support of Swiss Finance Institute. Johannes Brumm and Felix Kubler acknowledge the support of the ERC. The opinions expressed in this paper are those of the authors and should not be regarded as those of the European Central Bank or the Eurosystem.
Publisher Copyright:
© 2022 Elsevier Inc.
PY - 2023/1
Y1 - 2023/1
N2 - We assess the implications of collateral re-use on leverage, volatility, and welfare within a calibrated infinite-horizon asset-pricing model with heterogeneous agents and disaster shocks. In our model, the ability of agents to reuse frees up collateral that can be used to back more transactions. Re-use thus contributes to the buildup of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing re-use beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.
AB - We assess the implications of collateral re-use on leverage, volatility, and welfare within a calibrated infinite-horizon asset-pricing model with heterogeneous agents and disaster shocks. In our model, the ability of agents to reuse frees up collateral that can be used to back more transactions. Re-use thus contributes to the buildup of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing re-use beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.
KW - Collateral re-use
KW - Disaster shocks
KW - Heterogeneous agents
KW - Leverage
KW - Volatility
KW - Welfare
UR - http://www.scopus.com/inward/record.url?scp=85127829315&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85127829315&partnerID=8YFLogxK
U2 - 10.1016/j.red.2022.03.003
DO - 10.1016/j.red.2022.03.003
M3 - Article
AN - SCOPUS:85127829315
SN - 1094-2025
VL - 47
SP - 19
EP - 46
JO - Review of Economic Dynamics
JF - Review of Economic Dynamics
ER -