The Collateral Channel of Unconventional Monetary Policy

We build a general equilibrium model - along the lines of Williamson (2012) - where financial assets can be used as collateral in secured interbank markets to obtain reserves (central bank money). In this framework, frictions in the exchange process give rise to a liquidity premium for assets. An open market operation that provides reserves in exchange for assets decreases the availability of collateral by increasing its liquidity premium (and decreasing its return). The magnitude of the effect depends on assets' pledgeability properties (haircuts). We explore the positive implications of the model shown in the data. Focusing on the period 2009-2014, we analyse the relationship between yields of euro-area government bonds and the relative amount of bonds and central bank reserves held by the euro-area banking sector. We find evidence consistent with our model: yields decrease when reserves increase relative to bonds, with the effect being stronger at lower levels of haircuts. The results are confirmed after several robustness checks.