On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates
Federal Reserve Bank of St. Louis
Rehypothecation and Liquidity
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.
Cite this item
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.
Note: The original title was "Rehypothecation"
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
Keywords: rehypothecation; money; collateral; credit relationship
This item with handle RePEc:fip:fedlwp:2015-003
is also listed on EconPapers
For corrections, contact Anna Oates ()