TY  - BOOK
AU  - Lenel,Moritz
AU  - Piazzesi,Monika
AU  - Schneider,Martin
ED  - National Bureau of Economic Research.
TI  - The Short Rate Disconnect in a Monetary Economy
T2  - NBER working paper series
PY  - 2019///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - July 2019; Hardcopy version available to institutional subscribers
N2  - 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. We document stable business cycle relationships between spreads, leverage, and the safe portfolio share of payment intermediaries that are consistent with the model. Structural changes, especially in regulation, induce low frequency shifts, such as after the financial crisis
UR  - https://www.nber.org/papers/w26102
UR  - http://dx.doi.org/10.3386/w26102
ER  -