Collateral Framework: Liquidity Premia and Multiple Equilibria

Lengwiler, Yvan and Orphanides, Athanasios. (2021) Collateral Framework: Liquidity Premia and Multiple Equilibria. WWZ Working Paper, 2021 (06). Basel.

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Official URL: https://edoc.unibas.ch/82806/

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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. We 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.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Finanzmärkte (Lengwiler)
12 Special Collections > WWZ Publications > WWZ Discussion Papers and Working Papers
UniBasel Contributors:Lengwiler, Yvan
Item Type:Working Paper
Number of Pages:33
Note:Publication type according to Uni Basel Research Database: Discussion paper / Internet publication
Identification Number:
  • handle: RePEc:bsl:wpaper:2021/06
edoc DOI:
Last Modified:23 Apr 2021 09:01
Deposited On:22 Apr 2021 09:35

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