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Safe Assets, Collateralized Lending and Monetary Policy

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  • Moritz Lenel

    (Princeton University)

Abstract

I study how quantities of safe bonds affect asset prices and lending volumes in financial markets. In a quantitative model, heterogeneous agents trade securities of different maturity and risk exposure. Risk-tolerant investors issue collateralized bonds to obtain leverage and to insure the risk-averse. Despite the presence of higher return assets, the most risk-tolerant hold long-maturity safe assets, which they value as good collateral. The value of collateralizability is high when safe bond quantities are low. Given measured variations in safe bond quantities between 1990 and 2015, the model replicates the dynamics of lending volumes and generates large, volatile credit spreads and excess return predictability. The model also predicts price effects of high-frequency changes of government debt quantities around tax due dates. In policy experiments, I use the model to study the effects of central bank asset purchases.

Suggested Citation

  • Moritz Lenel, 2020. "Safe Assets, Collateralized Lending and Monetary Policy," Working Papers 2020-66, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-66
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    Citations

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    Cited by:

    1. Diamond, William & Landvoigt, Tim, 2022. "Credit cycles with market-based household leverage," Journal of Financial Economics, Elsevier, vol. 146(2), pages 726-753.
    2. Rohan Kekre & Moritz Lenel, 2022. "Monetary Policy, Redistribution, and Risk Premia," Econometrica, Econometric Society, vol. 90(5), pages 2249-2282, September.

    More about this item

    Keywords

    assets; safe bonds; safe assets;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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