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Modeling Monetary Policy

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Author Info

  • Samuel Reynard

    ()
    (Swiss National Bank)

  • Andreas Schabert

    ()
    (University of Amsterdam)

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.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-094/2.

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Date of creation: 10 Nov 2009
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Handle: RePEc:dgr:uvatin:20090094

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Web page: http://www.tinbergen.nl

Related research

Keywords: Monetary policy; Open market operations; Liquidity;

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Cited by:
  1. Javier GarcĂ­a-Cicco, 2010. "On the Quantitative Effects of Unconventional Monetary Policies," Working Papers Central Bank of Chile 573, Central Bank of Chile.
  2. Surach Tanboon & Suchot Piamchol & Tanawat Ruenbanterng & Paiboon Pongpaichet, 2009. "Impacts of Financial Factors on Thailand's Business Cycle Fluctuations," Working Papers 2009-01, Economic Research Department, Bank of Thailand.

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