No abstract

No abstract

This paper presents a business cycle model capturing the stylized features of housingmarket boom-bust cycles in developed countries. The model implies that over-optimism of mortgage borrowers generates housing-market boom-bust cycles, if mortgage borrowers are credit-constrained and savers do not share their optimism. This result holds without price stickiness. If price stickiness is introduced into the model, then the model replicates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate, given a Taylor rule. Thus, monetary easing observed during housing booms are consistent with the presence of over-optimism causing boom-bust cycles.

This paper presents a three-period model featuring a short-term investor in the over-the-counter bond market. A short-term investor stores cash because of a need to pay cash at some future date. If a short-term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex-ante, this holdup problem explains the use of a repo by a short-term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.JEL codes: G24 Keywords: repo, over-the-counter market, securities broker-dealer; short-term investor; haircut.A REPO IS ONE OF THE PRIMARY instruments in the money market. In this transaction, a short-term investor buys long-term bonds with a repurchase agreement in which the seller of the bonds promises to buy back the bonds at a later date. From the seller's point of view, this transaction is akin to a secured loan with the underlying bonds as collateral. A question remains, however, regarding why a short-term investor needs a repurchase agreement when the investor can simply resell bonds to a third party in a spot market. The answer to this question is not immediately I thank

No abstract