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Author:Easton, Matthew 

Working Paper
Interest Rates or Haircuts? Prices Versus Quantities in the Market for Collateralized Risky Loans

Markets for risky loans clear on two dimensions - an interest rate (or equivalently a spread above the riskless rate) and a specification of the amount of collateral per dollar of lending. The latter is summarized by the margin or "haircut" associated with the loan. Some key models of endogenous collateral constraints imply that the primary equilibrating force will be in the form of haircuts rather than movements in interest rate spreads. Indeed, an important benchmark model, derived in a two-state world, implies that haircuts will adjust to render all lending riskless, and that a loss of ...
Working Paper Series , Paper WP-2016-19

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