Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/233209
Authors: 
Lengwiler, Yvan
Orphanides, Athanasios
Year of Publication: 
2021
Series/Report no.: 
IMFS Working Paper Series No. 157
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. The authors show how such features in a central bank's collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.
Subjects: 
monetary policy
government finance
yields
liquidity premium
default premium
collateral
cliff effect
multiple equilibria
JEL: 
E58
E62
E43
Document Type: 
Working Paper

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