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Real consequences of open market operations: The role of limited commitment

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  • Carli, Francesco
  • Gomis-Porqueras, Pedro

Abstract

We study how limited commitment in credit markets affects the implementation of open market operations and characterize when they result in real indeterminacies and when they have real effects. To do so, we consider a frictional and incomplete market framework where agents face stochastic trading opportunities and limited commitment. We find necessary and sufficient conditions for the existence of a unique stationary monetary equilibrium when limited commitment does not restrict agent’s choices. However, real indeterminacies are possible when buyers face a binding no-default constraint. When the endogenous borrowing limit binds and bonds are not priced fundamentally, open market operations generically have real effects. A sale of government bonds can increase or decrease interest rates, depending on the nature of the equilibria. These phenomena are consistent with what is observed in the US. Moreover, when multiple equilibria exists welfare is larger at the steady state with a lower liquidity premium on government debt. Finally, government bond purchases can be used to rule out real indeterminacies, thus finding another rationale for such policy.

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  • Carli, Francesco & Gomis-Porqueras, Pedro, 2021. "Real consequences of open market operations: The role of limited commitment," European Economic Review, Elsevier, vol. 132(C).
    • Handle: RePEc:eee:eecrev:v:132:y:2021:i:c:s0014292120302695
    DOI: 10.1016/j.euroecorev.2020.103639
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Real consequences of open market operations: the role of limited commitment
      by Christian Zimmermann in NEP-DGE blog on 2019-08-04 13:31:07

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    Cited by:

    1. Saroj Dhital & Pedro Gomis-Porqueras & Joseph H. Haslag, 2020. "Monetary and Fiscal Policy Interactions in a Frictional Model of Money, Nominal Public Debt and Banking," Working Papers 2002, Department of Economics, University of Missouri.
    2. Dhital, Saroj & Gomis-Porqueras, Pedro & Haslag, Joseph H., 2021. "Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking," European Economic Review, Elsevier, vol. 139(C).
    3. Christian Bustamante, 2021. "More Money for Some: The Redistributive Effects of Open Market Operations," Staff Working Papers 21-46, Bank of Canada.

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    More about this item

    Keywords

    Taxes; Inflation; Liquidity premium;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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