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Gross Substitutability of Financial Assets: Effects on Monetary Policy

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  • Andrés Schneider

    ()
    (UBA - UTDT)

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    Abstract

    This paper seeks to discuss the relevance of the gross substitutability assumption in the assessment of the sustainability of the sterilization policy. In this line, different cases are proposed with the purpose of characterizing certain results in terms of financial cost and effectiveness of such policy. The sterilization policy is one of the key elements in the so-called "managed floating strategy" onetary regimes (Bonfinger y Wollmershäuser, 2003), and its success depends critically on the gross substitutability of financial assets assumption. This paper takes a partial equilibrium approach in order to capture the idea of how the non-financial private sector substitutes financial assets, and studies the implications (for monetary policy) of different scenarios in terms of the parametric configuration of assets demands. The main results show that the ability of the monetary authority to modify the balance sheet of the non-financial private sector depends critically on the parametric configuration of assets demands. And this parametric configuration is explained by the agents´ risk aversion and the expected returns variance-covariance matrix. This paper also includes a simple empirical exercise of the latter result.

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    File URL: http://www.bcra.gov.ar/pdfs/investigaciones/60_Schneider.pdf
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    Bibliographic Info

    Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

    Volume (Year): 1 (2010)
    Issue (Month): 60 (October - December)
    Pages: 105-136

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    Handle: RePEc:bcr:ensayo:v:1:y:2010:i:60:p:105-136

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    Keywords: assets´ gross substitutability; monetary regimen; monetary trilemma; sterilization policy;

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    1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    2. Santomero, Anthony M & Siegel, Jeremy J, 1981. "Bank Regulation and Macro-Economic Stability," American Economic Review, American Economic Association, vol. 71(1), pages 39-53, March.
    3. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc.
    4. Frederic S. Mishkin, 2007. "Monetary Policy Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134829, December.
    5. Tobin, James, 1970. "Deposit Interest Ceilings as a Monetary Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(1), pages 4-14, February.
    6. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    7. Paul De Grauwe & Magdalena Polan, 2005. "Is Inflation Always and Everywhere a Monetary Phenomenon?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 239-259, 06.
    8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    9. Tobin, James, 1981. "Money and Finance in the Macro-Economic Process," Nobel Prize in Economics documents 1981-1, Nobel Prize Committee.
    10. Roberto Frenkel, 2006. "An alternative to inflation targeting in Latin America: macroeconomic policies focused on employment," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(4), pages 573-591, July.
    11. Roberto Frenkel & Martin Rapetti, 2008. "Five years of competitive and stable real exchange rate in Argentina, 2002-2007," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 215-226.
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