Inside Money, Investment, and Unconventional Monetary Policy

Abstract

I develop a model where banks play a central role in monetary policy transmission. By credibly committing to repayment, banks can perform liquidity transformation. Illiquid assets may pay a liquidity premium because they allow banks to create liquid assets. The policy analysis discusses how the monetary authority can affect nominal rates and inflation when the fiscal authority follows nominal or real debt targets. A main result is that under a nominal debt target, the monetary authority is only able to increase inflation at the zero-lower bound by issuing money via lump-sum transfers, while doing so via bond purchases is ineffective.

Liquidity, the Mundell–Tobin Effect, and the Friedman Rule

“…There have been a few papers that find deviations from the Friedman rule to be optimal due to the Mundell-Tobin effect -e.g. Venkateswaran and Wright (2013), Geromichalos and Herrenbrueck (2017), Wright et al (2018), or Altermatt (2019a). However, in these papers there is usually an additional friction that leads to underinvestment at the Friedman rule, e.g., limited pledgeability, taxes, or wage bargaining.…”