Gross Substitutability of Financial Assets: Effects on Monetary Policy
AbstractThis 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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Bibliographic InfoArticle provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.
Volume (Year): 1 (2010)
Issue (Month): 60 (October - December)
assets´ gross substitutability; monetary regimen; monetary trilemma; sterilization policy;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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