Journal of Financial Market Infrastructures

Impact of monetary policy on collateral reuse

Ameya Muley

  • Rehypothecation allows intermediary to maximise investment in his project.
  • Asset purchases by central bank take away collateral, reducing aggregate output.
  • Asset purchases must be used only when collateral is abundant.


Rehypothecation is the direct reuse of collateral received by a lender to borrow on their own account from a third party. It enables the intermediate lender to maximize investment in their profitable project by making efficient use of the collateral. I show that when a central bank removes collateral from the market through an open market operation, less collateral is available to be borrowed by the productive intermediate lenders, leading to retarded investment by them and lower aggregate output. This is due to a pecuniary externality: the presence of other competing lenders increases the cost of rehypothecation for the productive lenders to inefficient levels. I find empirical evidence for this channel in the cost of borrowing in the bilateral repurchase agreement (repo) market. The policy implications of this result include conducting open market operations when collateral is abundant and the repo rate is high. It also suggests that using interest on reserves may be more effective as a policy tool compared with open market operations when collateral is scarce.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here