GSDM 43rd Platform Seminar
“Default Risks and Collateral in the Absence of Commitment in a Two-country Model”
8th Dec, 2014 10:30～12:10
(Hongo Campus,3rd Seminar room at Economics Research Annex (Kojima Hall))
Professor Fujiki will discuss the incentive role and the insurance role of collateral in a framework of optimal contract theory. The fire sale of collateral in the financial crisis may further worsen the economic conditions, thus being the concern of policy makers. A previous theoretical work has shown that the consumption of the lender will be the same whether the borrower is a productive agent or an unproductive agent. He considers two kinds of shocks to the second period of lenders’ lives, and obtains a different result. These two shocks make the consumption of lenders vary depending on the timing of transactions in the foreign exchange or goods market respectively, even though the lenders are insured from their borrowers’ default and have the same money balances. The policy implications from his analysis is that the recent efforts to enhance the efficiency of repo market transactions could be more welfare improving if they were accompanied by the other reforms that address the inefficiencies in the other markets.