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The effects of open market operations in a model of intermediation and growth

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  • Stacey L. Schreft
  • Bruce Smith

Abstract

This article presents a monetary growth model in which spatial separation and limited communication create a role for banks. Monetary policy interacts with the financial system's liquidity provision to affect the existence, multiplicity, and dynamical properties of equilibria. Moderate levels of risk aversion and tight monetary policy can lead to multiple steady rates. Dynamical equilibria can be indeterminate, with oscillatory paths. Thus financial market frictions are a source of indeterminacies and endogenous volatility. Under plausible conditions, tight monetary policy raises the nominal interest rate and inflation rate and reduces long-run output. Thus, a central bank's liquidity provision can promote growth.

Suggested Citation

  • Stacey L. Schreft & Bruce Smith, 1997. "The effects of open market operations in a model of intermediation and growth," Research Working Paper 97-03, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:97-03
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    Keywords

    Open market operations;

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