American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
The Collateral Composition Channel
American Economic Journal: Macroeconomics
(pp. 41–75)
Abstract
Wholesale financial markets reallocate deposits. Because of incentive problems, these flows are limited by endogenous collateral constraints. The composition of collateral matters. The use of inside collateral creates a "collateral pyramid": cash flows from one loan are pledged to secure another. Outside collateral, such as treasuries, stabilizes the pyramid. Through collateral pyramids the financial sector sustains a large volume of reallocation across banks, but at the cost of systemic panics. During panics, the safe asset creation process stalls, the pyramid collapses, collateral becomes scarce. Markets are more fragile when loans are secured by inside collateral.Citation
Boissay, Frédéric, and Russell Cooper. 2020. "The Collateral Composition Channel." American Economic Journal: Macroeconomics 12 (1): 41–75. DOI: 10.1257/mac.20170097Additional Materials
JEL Classification
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages