november, 2018

06nov12:00 pm1:15 pmMoritz LenelThe short rate disconnect in a monetary economyEvent:Student Research Workshop

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Abstract:
In modern monetary economies, most payments are made with inside money provided
by payment intermediaries. This paper studies interest rate dynamics when payment intermediaries
value short bonds as collateral to back inside money. We estimate intermediary Euler equations
that relate the short safe rate to other interest rates as well as intermediary leverage and portfolio
risk. Towards the end of economic booms, the short rate set by the central bank disconnects from
other interest rates: as collateral becomes scarce and spreads widen, payment intermediaries reduce
leverage and increase portfolio risk. Structural change in the 1980s and 1990s induces low frequency
shifts that mask otherwise stable business cycle relationships.

Time

(Tuesday) 12:00 pm - 1:15 pm

Location

Bendheim Center for Finance Room 101

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