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Publication by Udara Peiris in ‘Economic Theory’
HSE would like to congratulate Udara Peiris, Assistant Professor at ICEF on having his article ‘Collateral and the Efficiency of Monetary Policy’ accepted for publication in the international peer-reviewed journal ‘Economic Theory’. The article was coauthored by Alexandros Vardoulakis, Economist at the Board of Governors of the Federal Reserve System.
This paper argues that in a monetary Real Business Cycle economy, where a complete set of nominal contingent claims exist, the requirement to collateralize loans does not affect the equilibrium allocation when monetary policy is chosen optimally: in fact, the Pareto optimal allocation can be supported. The Friedman rule (r = 0), which would be optimal in the absence of collateral constraints, is not applicable in this case. At the resulting prices, collateral constraints come into play and the allocation is inefficient. However, positive interest rates (through an inflation tax on money balances) supports the Pareto optimal allocation when the collateral constraint is a limiting factor.