A European Central Bank paper, published on Monday, says the use of haircuts on repurchase agreements can help ease interbank lending rates during crises.
Björn Hilberg and Josef Hollmayr, the paper’s authors, use a New-Keynesian model that features an interbank market to analyse liquidity problems among heterogenous agents within the ﬁnancial sector and examine the macroeconomic consequences of a central bank resorting to unconventional monetary policy tools on an interbank market.
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