Costly Collateral and the Public Supply of Liquidity

July 1, 2000

Preview Citation

Format: Chicago

Philip Schellekens. Costly Collateral and the Public Supply of Liquidity, (USA: International Monetary Fund, 2000) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper addresses two complications arising from the use of collateral requirements in debt contracts between wealth-constrained entrepreneurs and banks. First, costly asset liquidation is found to enhance the susceptibility of debt finance to interest rate volatility. Second, aggregate uncertainty in conjunction with limited bank capitalization is shown to produce excessive credit constraints that, under certain conditions, justify the public supply of liquidity. The paper suggests applications with respect to models of interest rate smoothing and self-fulfilling currency crises.

Subject: Asset prices, Banking, Collateral, Credit, Financial institutions, Labor, Loans, Money, Prices, Self-employment

Keywords: Asset collateralization, Asset liquidation, Asset price uncertainty, Asset Price Volatility, Asset prices, Bank profit variability, Bank solvency consideration, Bank solvency constraint, Collateral, Contingent contract, Credit, Credit Constraints, Debt Finance, External finance, Interest rate, Loans, Net loan rate, Optimal contract, Rate repayment, Representative bank, Self-employment, Solvency constraint, WP

Publication Details

Pages:

24
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2000/125
Stock No:

WPIEA1252000
ISBN:

9781451854817
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers