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Optimal monetary policy in a collateralized economy

Author

Listed:
  • Gary Gorton

    (Yale University and NBER)

  • Ping He

    (Tsinghua University)

Abstract

Collateral plays a real role in an economy. Mortgage-backed and asset-backed securities (MBS/ABS) produced by the private sector are imperfect substitutes for Treasuries as collateral. The ratio of MBS/ABS to Treasuries is positively related to financial fragility because privately-produced collateral is risky. We analyze optimal central bank policy in a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.

Suggested Citation

  • Gary Gorton & Ping He, 2023. "Optimal monetary policy in a collateralized economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(1), pages 55-89, January.
    • Handle: RePEc:spr:joecth:v:75:y:2023:i:1:d:10.1007_s00199-021-01390-5
    DOI: 10.1007/s00199-021-01390-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Collateral; Monetary policy; Financial fragility; Open market operations;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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