Money and Collateral
Fabrizio Mattesini2020, Journal of Money, Credit and Banking
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Abstract
This paper presents a model in which money and collateral are both essential and complement each other as media of exchange. The model has implications for asset prices, output, in ‡ation and monetary policy, both in steady state and along dynamic paths of equilibria.
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In this paper we examine the effect of collateral requirements on the prices of long-lived assets. We consider a Lucas-style infinite-horizon exchange economy with heteroge-nous agents and collateral constraints. There are two trees in the economy which can be used as collateral for short-term loans. For the first tree the collateral requirement is determined endogenously while the collateral requirement for loans on the second tree are exogenously regulated. We show that the presence of collateral constraints and the endogenous margin requirements for the first tree lead to large excess price-volatility of the second tree. Changes in the regulated margin requirements for the second tree have large effects on the volatility of both trees. While tightening margins for loans on the second tree always decreases the price volatility of the first tree, price volatility of the second tree might very well increase with this change. In our calibration we allow for the possibility of disaste...
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A simple model of the demand for money and the demand for secondary media of exchange
Mises ([1912] 1953; [1949] 1998) put the theory of money on a sound basis by integrating it with marginal utility theory and clearly explaining the value of money in these terms (Mises 1990). One of the most important conclusions of Misesian monetary theory is that the demand for money is always demand to hold, i.e., money performs its utility by being owned and held in a cash balance (Hutt 1956; Hoppe 2012), not by being exchanged. This function could also partly be fulfilled by what Mises termed secondary media of exchange: Commodities and claims held by a person in order to economize on the need to hold money, as their high degree of secondary marketability make them suitable for this purpose. Salerno (2015), building on Rothbard's ([1962] 2009) extension of Misesian monetary theory, presents a simple model distinguishing between the exchange demand for money and the reservation demand for money. Building on this model, we aim to show how we can better grasp the difference between money and secondary media of exchange by considering them in terms of the different kinds of demand for each. Only money proper has any appreciable exchange demand in the Rothbardian sense, whereas secondary media of exchange are only subject to monetary reservation demand in addition to non-monetary demand. Considering the demand for money and secondary media of exchange in these terms allows us to address what in recent literature has been called the quality of money (Hendershott 1969; Bagus 2009; 2015; Bagus and Howden 2016; Žukauskas Forthcoming). High quality money will have a higher reservation demand, while lower quality money will have a lower reservation demand. Similarly, the higher the quality of money, the lower the demand for secondary media of exchange and vice versa. In this way, we can consider the existence and importance of secondary media of exchange a proxy for the quality of money. At the same time, the fuller development of monetary theory presented by Rothbard and Salerno explains how low quality money can continue to exist without leading to an inflationary collapse: So long as there is widespread and strong exchange demand for the monetary medium, this is all that is needed to secure the continued existence of even low-quality money with little or no reservation demand.
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Distribution électronique Cairn.info pour Association Française de Finance. © Association Française de Finance. Tous droits réservés pour tous pays. La reproduction ou représentation de cet article, notamment par photocopie, n'est autorisée que dans les limites des conditions générales d'utilisation du site ou, le cas échéant, des conditions générales de la licence souscrite par votre établissement. Toute autre reproduction ou représentation, en tout ou partie, sous quelque forme et de quelque manière que ce soit, est interdite sauf accord préalable et écrit de l'éditeur, en dehors des cas prévus par la législation en vigueur en France. Il est précisé que son stockage dans une base de données est également interdit.
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We show, in an exchange economy with liquidity constraints, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is derived along the lines of . Two agents trade goods and nominal assets (Arrow-Debreu (AD) securities) to smooth consumption across periods and future states, in the presence of cash-in-advance financing costs. We show, with Von Neumann-Morgenstern utility functions and relative risk-aversion greater than 1, that the price of AD securities, are inversely related to liquidity. A closed-from solution is obtained for a CRRA utility function, even when including aggregate uncertainty and different subjective probabilities for the two agents. The upshot of our argument is that agents' expectations computed using risk-neutral probabilities give more weight in the states with higher interest rates. This result cannot be found in a Lucas-type representative agent general equilibrium model where there is neither trade nor money. Hence, an upward yield curve can be supported in equilibrium, even though short-term interest rates are fairly stable, and even in the absence of aggregate uncertainty. The risk-premium in the term structure is therefore a pure liquidity risk premium.
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Much of the lending in modern economies is secured by some form of collateral: residential and commercial mortgages and corporate bonds are familiar examples. This paper builds an extension of general equilibrium theory that incorporates durable goods, collateralized securities, and the possibility of default to argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure, and the efficiency of market outcomes. These findings provide insights into housing and mortgage markets, including the subprime mortgage market.
Credit Money, Collateral and the Solvency of Banks: A Post Keynesian Analysis of Credit Market Failures
Review of Political Economy, 2011
The discussion on endogenous money has led to a rich understanding of banking. The determination of creditworthiness though remains a black box in Post Keynesian economics. After a critique of the New Keynesian banking literature this paper argues that creditworthiness to a large extent is endogenous to the monetary economy and the credit system. It is argued that a solvency multiplier exists that affects the willingness of banks to grant credit. The multiplier works via the valuation of collateral goods. It can accelerate the growth but also the contraction of credit and explains both endogenous financial crises and credit rationing.
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