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Rehypothecation and liquidity

Andolfatto, David, Martin, Fernando M. and Zhang, Shengxing (2017) Rehypothecation and liquidity. European Economic Review, 100. pp. 488-505. ISSN 0014-2921

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Identification Number: 10.1016/j.euroecorev.2017.09.010

Abstract

We develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets. Rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed. The liquidity benefits associated with rehypothecation are shown to be more important in high-inflation (high interest rate) regimes. Regulations restricting the practice are shown to have very different consequences depending on how they are designed. Assigning collateral to segregated accounts, as prescribed in the Dodd-Frank Act, is generally welfare-reducing. In contrast, an SEC15c3-3 type regulation can improve welfare through the regulatory premium it confers on cash holdings, which are inefficiently low when interest rates and inflation are high

Item Type: Article
Official URL: http://doi.org/10.1016/j.euroecorev.2017.09.010
Additional Information: © 2017 Elsevier
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
Sets: Departments > Economics
Date Deposited: 10 Oct 2017 16:16
Last Modified: 20 Jul 2019 02:37
URI: http://eprints.lse.ac.uk/id/eprint/84558

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