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Modeling Monetary Policy

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  • Samuel Reynard
  • Andreas Schabert

Abstract

We develop a macroeconomic framework where money is supplied against only few eligible securities in open market operations. The relationship between the policy rate, expected inflation and consumption growth is affected by money market conditions, i.e. the varying liquidity value of eligible assets and the associated risk. This induces a liquidity premium, which explains the observed systematic wedge between the policy rate and consumption Euler interest rate that standard models equate. It further implies a dampened response of consumption to policy rate shocks that is humpshaped when we account for realistic central bank transfers and the dynamics of bond holdings.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2010-04.

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Length: 46 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:snb:snbwpa:2010-04

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Keywords: Monetary Policy; Open market operations; Liquiditypremium; Money market rate; Consumption Eulerrate; Monetary policy transmission;

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Cited by:
  1. Javier García-Cicco, 2010. "On the Quantitative Effects of Unconventional Monetary Policies," Working Papers Central Bank of Chile, 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, Economic Research Department, Bank of Thailand 2009-01, Economic Research Department, Bank of Thailand.

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