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Liquidity Effects of Central Banks' Asset Purchase Programs

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  • Mahmoudi, Babak

Abstract

I construct a model of the monetary economy, in which different assets provide liquidity services. Assets differ in terms of the liquidity services they provide, and money is the most liquid asset. The central bank can implement policies by changing the relative supply of money and other assets. I show that the central bank can change the overall liquidity and welfare of the economy by changing the relative supply of assets with different liquidity characteristics. A liquidity trap exists away from the Friedman rule that has a positive real interest rate; the central bank's asset purchase/sale programs may be ineffective in instances of low enough inflation rates. My model also enables me to study the welfare effects of a restriction on trade with government bonds.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49424.

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Date of creation: 21 Jun 2013
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Handle: RePEc:pra:mprapa:49424

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Keywords: Open-Market Operation; Liquidity Effects; Liquidity Trap;

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  1. Shouyong Shi, 2008. "Efficiency Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-329, University of Toronto, Department of Economics.
  2. Auerbach, Alan J. & Obstfeld, Maurice, 2012. "The Case for Open-Market Purchases in a Liquidity Trap," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt84s7d8c8, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Vasco Curdia & Michael Woodford, 2010. "The Central Bank Balance Sheet as an Instrument of Monetary Policy," Discussion Papers, Columbia University, Department of Economics 0910-16, Columbia University, Department of Economics.
  4. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
  5. Narayana Kocherlakota, 2003. "Societal Benefits of Illiquid Bonds," Levine's Working Paper Archive 506439000000000300, David K. Levine.
  6. Javier Andrés & J. David López Salido & Edward Nelson, 2004. "Tobin's imperfect substitution in optimizing general equilibrium," Banco de Espa�a Working Papers 0409, Banco de Espa�a.
  7. Javier Andres & J. David López-Salido & Edward Nelson, 2004. "Tobin's imperfect asset substitution in optimizing general equilibrium," Working Papers 2004-003, Federal Reserve Bank of St. Louis.
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