Can the Hybridity of Law and Finance Save Central Banking in a Zero-Lower Bound Recession? A Money and Legal View

Saeidinezhad, Elham and Hovhannisyan, Tatev (2019): Can the Hybridity of Law and Finance Save Central Banking in a Zero-Lower Bound Recession? A Money and Legal View.

Abstract

As the U.S. experience revealed after the Global Financial Crisis (GFC), zero lower bound (ZLB) limits the Fed's capacity to stimulate the economy through conventional methods of monetary policy. The GFC provided a chance to advance unconventional tools to strengthen economic growth and reclaim financial stability. One of the aims of the existing unconventional tools has been to provide liquidity to the banks. To account for the dynamic reality of the financial ecosystem, we propose two new instruments through which the Fed targets nonbank securities dealers and debt issuers explicitly. By design, these tools should be used as last resort options. The first tool called the "Dealer Option" and functions by opening the Fed's balance sheet to securities dealers to increases liquidity in the market. The second tool, "Elastic Legal Policy," suggests relaxing legal constraints in debt securities contracts during the financial crisis to reduce debt issuers' default risks. Given the interconnectedness of balance sheets and cash flows as well as the role of securities dealers as market makers, the elastic legal policy and dealer option help reduce debtors' defaults and liquidity risk during a financial crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Crisis, Financial Stability, Central Banking, Debt Securities
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies; K - Law and Economics > K0 - General; K - Law and Economics > K2 - Regulation and Business Law > K22 - Business and Securities Law

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