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

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

Author: Gikas A. Hardouvelis

Issue: Banque De France- Symposium on New Technologies and Monetray Policy, 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

Download Asset Prices and the Need for New Policy Instruments: the Case of Countercyclical Margin Policy pdf (pages 331 to 350 of the Issue, 126 to 145 of the .pdf).