Using transaction-level data from the Korean tri-party repo market, we study how repo contract terms interact with collateral quality. Both haircuts and interest rates rise with collateral risk, consistent with existing evidence. Conditional on collateral quality, however, we find a trade-off: a one-percentage-point increase in the spread is associated with a 1.3-percentage-point reduction in the haircut. The same increase in the interest rate is associated with a smaller reduction in the haircut under heightened market uncertainty, indicating that insurance against default becomes more valuable as default risk rises. We show that the interaction between lenders’ incentives to acquire information and borrowers’ opportunistic default risk explains both the positive unconditional relationship and the negative conditional relationship between haircuts and interest rates.
ABSTRACT This paper provides novel empirical evidence that cash‐rich firms have higher equity payouts and higher stock prices in response to expansionary monetary policy surprises. Stock prices rise despite weak cash‐flow, investment, and credit responses to monetary policy. I rationalize the empirical evidence in a heterogeneous‐firm New Keynesian model where firms finance investment with cash and equity issuance. Monetary easing weakens precautionary cash demand, leading cash‐rich firms to optimally allocate excess funds to shareholders. Since payouts are procyclical, cash‐rich firms earn higher returns in expansionary periods. My findings highlight a payout channel through which monetary policy impacts asset prices.
ABSTRACT We study the role of asset revaluation in the monetary transmission mechanism. We build an analytical heterogeneous‐agents model with two main ingredients: (i) rare disasters and (ii) heterogeneous beliefs. The model captures time‐varying risk premia and precautionary savings in a setting that nests the textbook New Keynesian model. The model generates large movements in asset prices after a monetary shock but these movements can be neutral on real variables. Real effects depend on the redistribution among agents with heterogeneous precautionary motives. In quantitative analysis, we find that this channel can account for a large fraction of the transmission to aggregate consumption.
Fiscal costs of excessive debt should be assessed dynamically reflecting anticipated growth, deficits, and interest rates. Studying their joint behavior, with overlapping generations and structural deficits arising from social security, we define government debt capacity as the level that can be just sustained with current fiscal parameters unchanged all the way to an unstable steady state, in which primary deficits last forever. Below capacity, debt converges to a stable steady state. Above capacity, debt unravels. Exceeding capacity without unraveling requires higher future taxes or reduced expenditures, which is the true fiscal cost. With money, capacity increases with the target nominal interest rate if the Taylor coefficient is below one. Increasing capacity by subsidizing innovation is challenging as benefits hardly surpass costs. This paper was accepted by Lukas Schmid, finance. Funding: P. Ehling acknowledges support of the Centre for Advanced Study in Oslo, Norway, which funded and hosted his research project (Asset Pricing with Heterogeneous Investors in Overlapping Generations) during the 2024/25 academic year. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2024.06528 .
We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the southern European crisis of the early 2010s and the Argentine default of 2001. The source of multiplicity is the one proposed by Calvo. Crucial for multiplicity is an output process characterized by long periods of either high growth or stagnation, which we estimate using data for these countries. Our analysis suggests that expectations-driven debt crises are quantitatively relevant but state dependent, as they occur only during periods of stagnation. Expectations and how they respond to policy are the major factors explaining default rates and credit spread differences between Spain and Argentina.
This article presents a model of quantitative easing (QE) at the zero lower bound (ZLB) on the short-term nominal interest rate. QE, which reduces the maturity of government debt, is effective at the ZLB because it generates expectations of future monetary expansion in a time-consistent equilibrium. Numerical experiments show that this effect can be substantial.
We develop a theory that rationalizes the use of a dominant unit of account in an economy.Agents enter into non-contingent contracts with a variety of business partners.Trade unfolds sequentially in credit chains and is subject to random matching.By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus.We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of "currency areas" when there is variation in the intensity of trade within and across regions.