Abstract
AbstractCollateral plays a real role in an economy. Mortgage-backed and asset-backed securities (MBS/ABS) produced by the private sector are imperfect substitutes for Treasuries as collateral. The ratio of MBS/ABS to Treasuries is positively related to financial fragility because privately-produced collateral is risky. We analyze optimal central bank policy in a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.
Publisher
Springer Science and Business Media LLC
Subject
Economics and Econometrics
Cited by
1 articles.
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