Rehypothecation

Rehypothecation refers to the practice of re-using (selling or pledging as collateral) an asset that has already been pledged as collateral for a loan. We develop a dynamic general equilibrium monetary model where an “asset shortage” motivates the rehypothecation of assets. We find that in high inflation-high interest rate economies, rehypothecation improves economic welfare, but that there is generally too much of it. We find that regulatory constraints that limit the practice can improve economic welfare.