Arbeitspapier

Monetary policy under subjective beliefs of banks: Optimal central bank collateral requirements

We study how the subjective beliefs about loan repayment on the side of liquidity-constrained banks affect the central bank's choice of collateral standards in its lending facilities. Optimism on the side of banks, entailing a higher collateral value of bank loans, can lead to excessive lending and bank default. Pessimism, though, can entail insufficient lending and productivity losses. With an appropriate haircut on collateral, the central bank can perfectly neutralize the banks' belief distortions and always induce the socially optimal allocation. Under uncertainty about beliefs, the central bank's incentives to set looser collateral standards increase. This reduces the risk of deficient bank lending if sufficiently pessimistic beliefs realize. In extreme cases, monetary policy aims at mitigating productivity losses only, instead of also avoiding bank default.

Language
Englisch

Bibliographic citation
Series: Economics Working Paper Series ; No. 21/357

Classification
Wirtschaft
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Expectations; Speculations
Money Supply; Credit; Money Multipliers
Monetary Policy
Central Banks and Their Policies
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Subject
beliefs
collateral
liquidity
central bank
banks

Event
Geistige Schöpfung
(who)
Böser, Florian
Event
Veröffentlichung
(who)
ETH Zurich, CER-ETH - Center of Economic Research
(where)
Zurich
(when)
2021

DOI
doi:10.3929/ethz-b-000492271
Handle
Last update
10.03.2025, 11:45 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Böser, Florian
  • ETH Zurich, CER-ETH - Center of Economic Research

Time of origin

  • 2021

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