IMF Working Papers

Costly Collateral and the Public Supply of Liquidity

By Philip Schellekens

July 1, 2000

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Philip Schellekens. Costly Collateral and the Public Supply of Liquidity, (USA: International Monetary Fund, 2000) accessed September 24, 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

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