How high can we raise interest rates? Monetary policy and collateral-based finance in Eurozone

This article proposes to mobilize the concept of collateral-based finance, i.e. a financial system characterized by the importance of collateral-based transactions, and to draw some lessons for the conduct of monetary policy in eurozone. In particular, the dynamics of instability specific to collateral markets, which are essential to the stability of collateralized transactions, limit access to short-term financing: the « plumbing » of the financial system. In eurozone, where member states are competing for the status of the top quality collateral, these dynamics greatly complicate the conduct of monetary policy. Since the subprime crisis, central banks have gradually changed their monetary policy frameworks towards a more active management of market liquidity, becoming « dealer of last resort ». The possibility of a rise in interest rates, which is particularly appropriate in the current inflationary context, faces the risk of further fragmentation of the European public debt market, and ultimately of the monetary union itself. The adoption by the ECB of a new monetary policy instrument, the Transmission Policy Instrument (TPI), reflects the new risks facing ECB in this context where the quality of the assets used as collateral, primarily government debt, plays a crucial role for financial stability.