collateral to support arbitrage trades. We show that with volatile asset demands, arbitrage becomes risky. With information … frictions, a looser collateral policy might render the economy more vulnerable to extremely large demand shocks, while a tighter … collateral constraint helps maintain the stability at the cost of market liquidity supply …

answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a … collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose … movements, which exacerbate fluctuations in the wedges induced by the collateral constraint. In this context optimality requires …