Subject：Liquidity, Collateral Constraint, and Interest Rates

Speaker：Zhixiong Zeng

Professor in Zhongnan University of Economics and Law, graduated from Northwestern University USA in 2002 with the degree of doctor of economics. He has taught in The Chinese University of Hong Kong, Peking University and Monash University Australia successively. His major research field includes monetary economics and financial economics and international finance. His research has been published in international famous financial magazines like Journal of Economic Theory、Journal of Banking & Finance and Journal of Real Estate Economics.

Time: march 4th 2016 (Friday), 13:30-14:30

Venue: Meeting Room 913, Main Building

Host: Zhigang Huang, Vice Professor from School of Finance, Central University of Finance and Economics

Host unit: School of Finance, Central University of Finance and Economics, Center for International Finance Studies、collaborative innovation center for global finance governance

Abstract：We study the determination of interest rates in a New Monetarist framework with public and private liquidity provision. We link the provision of liquidity to collateral constrains in the credit market, and explore the implications of this link for optimal monetary policy. We show that for decentralized trade it is optimal to have zero liquidity premium on interest-bearing assets, but for the credit market it is optimal to allow for positive liquidity premium on interest-bearing assets as long as lenders and borrowers (entrepreneurs) differ in time preferences and there is positive haircut for collateral assets. The Friedman rule is suboptimal because it traps the equilibrium real interest rate in its maximum possible value, which is detrimental to the credit market.