Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2009-11-10
Number: 09-094/2
Author-Name: Samuel Reynard
Author-Email: samuel.reynard@snb.ch
Author-Workplace-Name: Swiss National Bank
Author-Name: Andreas Schabert
Author-Email: a.schabert@uva.nl
Author-Workplace-Name: University of Amsterdam
Title: Modeling Monetary Policy
Abstract: We develop a macroeconomic framework where money issupplied against only few eligible securities in open marketoperations. The relationship between the policy rate,expected inflation and consumption growth is affected bymoney market conditions, i.e. the varying liquidity value ofeligible assets and the associated risk. This induces a liquiditypremium, which explains the observed systematic wedgebetween the policy rate and consumption Euler interest ratethat standard models equate. It further implies a dampenedresponse of consumption to policy rate shocks that is humpshapedwhen we account for realistic central bank transfersand the dynamics of bond holdings.
Classification-JEL: E52; E58; E43; E32
Keywords: Monetary policy; Open market operations; Liquidity
File-Url: https://papers.tinbergen.nl/09094.pdf
File-Format: application/pdf
File-Size: 437822 bytes
Handle: RePEc:tin:wpaper:20090094