Modeling Monetary Policy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract We develop a macroeconomic framework where money is supplied against only few eligible securities in open market operations. The relationship between the policy rate, expected inflation and consumption growth is affected by money market conditions, i.e. the varying liquidity value of eligible assets and the associated risk. This induces a liquidity premium, which explains the observed systematic wedge between the policy rate and consumption Euler interest rate that standard models equate. It further implies a dampened response of consumption to policy rate shocks that is humpshaped when we account for realistic central bank transfers and the dynamics of bond holdings. Terms of use: Documents inJEL classification: E52; E58; E43; E32.

Central Bank Liquidity Management and “Unconventional” Monetary Policies

“…In turn, this opens the room to analyze a number of policies that are observed in real life but that cannot be captured with the usual models. This feature is the main result that we borrow from Reynard and Schabert (2009), extended here to a model with banks and in a small open economy framework.…”

“…In the second sub-period the money market opens. As in Reynard and Schabert (2009), Schabert (2010) and Hörmann and Schabert (2010), money is traded in this market with the central bank in exchange for a selected list of assets (in this baseline case, bonds). 15 These operations can take two forms: outright purchases or repo agreements.…”

“…Notice that the difference between I t and M t − M t−1 equals the money supplied under repos.18 Notice that the interest rate reacts to changes in domestic production and not in GDP, for the former will also be influenced by commodity production, which is exogenous in the model. Recall that variables without time subscripts represent steady state values.19 We will later show that, without the reserve requirement, banks will choose not to hold any reserves.20 A similar assumption, but in a model without banks, is present inReynard and Schabert (2009),Schabert (2010) andHörmann and Schabert (2010), where they assume a constant ratio of stock of money supplied under repos (equal to I t − M t + M t−1 in our model) relative to the stock supplied outright (M t ) Reynard and Schabert (2009). argue that this is consistent with the implementation of monetary policy by the Federal Reserve.…”