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The Macroeconomic Implications of Limited Arbitrage

SSRN, ISSN: 1556-5068
2017
  • 0
    Citations
  • 2,449
    Usage
  • 0
    Captures
  • 0
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Metric Options:   Counts1 Year3 Year

Metrics Details

  • Usage
    2,449
    • Abstract Views
      2,136
    • Downloads
      313
  • Ratings
    • Download Rank
      180,239

Article Description

We develop a tractable model to study the macroeconomic impacts of limited arbitrage through collateralization. Arbitrage activities and the business cycle are mutually enhancing; but their interaction can escalate unexpected shocks into arbitrage crashes and recession. Through the interaction, we derive a micro-foundation for the endogenous, time-varying, negative borrowing rates and identify the relevant policy transmission channel. With regime shifts, we account for the non-linear aspects of crises and the slow and incomplete recoveries. Given the post-crisis regulatory reforms, we derive policy implications on liquidity provision, financial resilience and economic growth.

Bibliographic Details

Ally Quan Zhang

Elsevier BV

Multidisciplinary; limits of arbitrage; financial crises; mispricing; slow recovery; regime shifts; multiple equilibria; collateralization; externality

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