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Federal Reserve Bank of St. Louis
Working Papers
Rehypothecation and Liquidity
David Andolfatto
Fernando M. Martin
Shengxing Zhang

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.

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Download https://doi.org/10.20955/wp.2015.003
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David Andolfatto & Fernando M. Martin & Shengxing Zhang, Rehypothecation and Liquidity, Federal Reserve Bank of St. Louis, Working Papers 2015-3, 02 Feb 2015, revised 06 Mar 2017.
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Note: The original title was "Rehypothecation"
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Keywords: rehypothecation; money; collateral; credit relationship
DOI: 10.20955/wp.2015.003
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