Asset Prices and the Need for New Policy Instruments: the Case of Countercyclical Margin Policy

Author: Gikas A. Hardouvelis
Publicaton: Proceedings of the International Symposium “Monetary Policy, Economic Cycle and Financial Dynamics”, -pg.331-,BANQUE DE FRANCE, March 2003

Abstract:
Margin requirements are official restrictions on the amount of credit investors can receive from brokers in order to buy or short-sell stock (Hardouvelis, 1988). A margin policy of leaning against the wind of stock price fluctuations is stabilizing both in the short- and the long-run. Higher margins reduce both short-run stock price volatility and the possibility that a
bubble unfolds, thus contributing to both short- and long-term stability in the market. Increasing margins is a precautionary measure. At the other end, lower margin requirements soften a sudden fall of stock prices without resulting in higher short-run volatility. Decreasing margins is an ex-post measure that improves liquidity, calms the market and softens a crash. Unlike monetary policy, a countercyclical margin policy can be administered without having to agree on the presence or absence of a bubble and without having to compromise any other policy objectives. It can also be administered by a regulator other than the central bank.

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