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/lp/american-economic-association/safe-assets-liquidity-and-monetary-policy-lQ38ZmDcPO
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- Publisher
- American Economic Association
- Copyright
- Copyright © 2017 by the American Economic Association
- Subject
- Articles
- ISSN
- 1945-7715
- eISSN
- 1945-7715
- DOI
- 10.1257/mac.20150073
- Publisher site
- See Article on Publisher Site
Abstract
Abstract This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and “pseudo-safe” assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession-cum-deflation. Expanding the central bank’s balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers. ( JEL E31, E32, E43, E44, E52 )
Journal
American Economic Journal Macroeconomics – American Economic Association
Published: Apr 1, 2017