Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/208252
Authors: 
Brumm, Johannes
Grill, Michael
Kubler, Felix
Schmedders, Karl
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper No. 2218
Abstract: 
We assess the quantitative implications of collateral re-use on leverage, volatility, and welfare within an infinite-horizon asset-pricing model with heterogeneous agents. In our model, the ability of agents to reuse frees up collateral that can be used to back more transactions. Re-use thus contributes to the buildup of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing re-use beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.
Subjects: 
Heterogeneous agents
leverage
re-use of collateral
volatility
welfare
JEL: 
D53
G01
G12
G18
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3323-0
Document Type: 
Working Paper

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