This can inform and enhance global macroeconomic stability, fostering policy coordination and coherence.
The research paper can be found here.
We consider a macroprudential approach to analyze the optimal lending policy for the central bank, focusing on spillover effects that policy exerts on money markets. Lending against high-quality collateral protects central banks against losses, but can adversely affect liquidity creation in markets since high-quality collateral gets locked up with the central bank rather than circulating in markets. Lending against low-quality collateral creates counterparty risk but can improve liquidity in markets. We illustrate the optimal policy incorporating these trade-offs. Contrary to what is generally accepted, lending against high-quality collateral can have negative effects, whereas it may be optimal to lend against low-quality collateral.
João Santos joined Nova School of Business and Economics as a Visiting Professor in September 2011. João Santos currently serves as Senior Vice President of the Federal Reserve Bank of New York.Website
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