Abstract
We empirically investigate the relationship between the return on collateral and monetary policy implementation in the channel system. Recent developments in monetary theory suggest that the return on government assets which measures the opportunity cost of holding collateral should have negative impacts on the interest‐rate spread and the interbank market rate. The central bank should set a higher spread when the return on collateral is below a cutoff but implements a lower spread when the return on collateral is higher than the cutoff. The interbank market rate tends to lie above the policy target rate when the return on collateral is low and vice versa. We use data from Eurozone area and six industrialized countries to test these theoretical implications. We propose two econometric models: one is more structural and closely related to the monetary model to test the negative relationships, and the other is based on the threshold autoregression model to detect the potential cutoffs. Our findings provide conditional support for the negative impact of return on collateral. (JEL E40, E52, E58)
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
