TY  - JOUR
AU  - Ashcraft, Adam
AU  - Gârleanu, Nicolae
AU  - Pedersen, Lasse Heje
TI  - Two Monetary Tools: Interest Rates and Haircuts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16337
PY  - 2010
Y2  - September 2010
DO  - 10.3386/w16337
UR  - http://www.nber.org/papers/w16337
L1  - http://www.nber.org/papers/w16337.pdf
N1  - Author contact info:
Adam Ashcraft
Federal Reserve Bank of New York
E-Mail: adam.b.ashcraft@gmail.com

Nicolae B. Gârleanu
Haas School of Business
F628
University of California, Berkeley
Berkeley, CA 94720
Tel: (1) 510 642 3421
Fax: (1) 510 643 1420
E-Mail: garleanu@haas.berkeley.edu

Lasse H. Pedersen
Copenhagen Business School
Solbjerg Plads 3, A5
DK-2000 Frederiksberg
DENMARK
E-Mail: Lhp001@gmail.com
M1  - published as Adam Ashcraft, Nicolae Gârleanu, Lasse Heje Pedersen. "Two Monetary Tools: Interest Rates and Haircuts," in Daron Acemoglu and Michael Woodford, editors, "NBER Macroeconomics Annual 2010, Volume 25" University of Chicago Press (2011)

M3  - presented at "25th Annual Conference on Macroeconomics", April 9-10, 2010
AB  - We study a production economy with multiple sectors financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction of the interest rate can increase the required return of high-haircut assets since it can increase the shadow cost of capital for constrained agents. The required return can be lowered by easing funding constraints through lowering haircuts. To assess empirically the power of the haircut tool, we study the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). By considering unpredictable rejections of bonds from TALF, we estimate that haircuts had a significant effect on prices. Further, unique survey evidence suggests that lowering haircuts could reduce required returns by more than 3% and provides broader evidence on the demand sensitivity to haircuts.
ER  -