Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary Policy Trade-Offs in a Portfolio Model with Endogenous Asset Supply

Contents:

Author Info

  • Schüder, Stefan

Abstract

This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers choose an optimal capital structure and finance capital goods through credit, bonds and equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the law of one price. Within this general equilibrium model, it will be shown that central bank interventions may promote an inefficient international allocation of real capital. The application of expansive monetary interventions throughout the course of economic crises maintains the domestic stock of real capital at the cost of inflation, currency devaluation, distortions of interest rates and asset prices, and risk clusters on the central bank s balance sheet. Exchange rate stabilising interventions have the result that the central bank can also stabilise the domestic stock of real capital. However, such interventions produce either risk clusters on the central bank s balance sheet or changes in the domestic price level. --

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econstor.eu/bitstream/10419/65402/1/VfS_2012_pid_727.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 65402.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:zbw:vfsc12:65402

Contact details of provider:
Email:
Web page: http://www.socialpolitik.org/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Vincent Reinhart & Brian Sack, 2000. "The Economic Consequences of Disappearing Government Debt," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 163-220.
  2. Ariel Burstein & Christian Hellwig, 2008. "Welfare Costs of Inflation in a Menu Cost Model," American Economic Review, American Economic Association, American Economic Association, vol. 98(2), pages 438-43, May.
  3. Girton, Lance & Henderson, Dale W., 1976. "Financial capital movements and central bank behavior in a two-country, short-run portfolio balance model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(1), pages 33-61, January.
  4. Gian‐Maria Milesi‐Ferretti & Cédric Tille, 2011. "The great retrenchment: international capital flows during the global financial crisis," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 26(66), pages 285-342, 04.
  5. Anna Pavlova & Roberto Rigobon, 2007. "Asset Prices and Exchange Rates," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 20(4), pages 1139-1180.
  6. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports, Federal Reserve Bank of New York 226, Federal Reserve Bank of New York.
  7. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
  8. Ivan Werning & George-Marios Angeletos, 2005. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," 2005 Meeting Papers, Society for Economic Dynamics 284, Society for Economic Dynamics.
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  10. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland.
  11. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, Elsevier, vol. 54(5), pages 659-677, July.
  12. Kathryn M. E. Dominguez, 2003. "When Do Central Bank Interventions Influence Intra-Daily and Longer-Term Exchange Rate Movements?," Working Papers, Research Seminar in International Economics, University of Michigan 506, Research Seminar in International Economics, University of Michigan.
  13. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(3), pages 335-359.
  14. Tille, Cédric & van Wincoop, Eric, 2008. "International Capital Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6705, C.E.P.R. Discussion Papers.
  15. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary policy alternatives at the zero bound: an empirical assessment," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-48, Board of Governors of the Federal Reserve System (U.S.).
  16. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 901-21, September.
  17. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  18. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc.
  19. Patrick Bolton & Xavier Freixas, 2006. "Corporate Finance and the Monetary Transmission Mechanism," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(3), pages 829-870.
  20. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," 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 qt124628cx, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  21. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
  22. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2690, C.E.P.R. Discussion Papers.
  23. George Kapetanios & Haroon Mumtaz & Ibrahim Stevens & Konstantinos Theodoridis, 2012. "Assessing the Economy‐wide Effects of Quantitative Easing," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 122(564), pages F316-F347, November.
  24. Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  25. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 94-2, Federal Reserve Bank of Chicago.
  26. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 85-90, May.
  27. Vladimir Klyuev & Phil De Imus & Krishna Srinivasan, 2009. "Unconventional Choices for Unconventional Times Credit and Quantitative Easing in Advanced Economies," IMF Staff Position Notes 2009/27, International Monetary Fund.
  28. Helg, Rodolfo & Manasse, Paolo & Monacelli, Tommaso & Rovelli, Riccardo, 1995. "How much (a)symmetry in Europe? Evidence from industrial sectors," European Economic Review, Elsevier, Elsevier, vol. 39(5), pages 1017-1041, May.
  29. Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, Elsevier, vol. 198(1), pages 1-22, October.
  30. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp124, IIIS.
  31. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 247-274, March.
  32. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1603-1635, August.
  33. Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 85(270), pages 357-358, 09.
  34. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 300-351, February.
  35. Christopher J. Neely, 2003. "The Federal Reserve responds to crises: September 11th was not the first," Working Papers, Federal Reserve Bank of St. Louis 2003-034, Federal Reserve Bank of St. Louis.
  36. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
  37. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 41-59.
  38. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  39. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
  40. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  41. Harald Hau & Helene Rey, 2002. "Exchange Rate, Equity Prices and Capital Flows," NBER Working Papers 9398, National Bureau of Economic Research, Inc.
  42. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(4), pages 236-251.
  43. Dornbusch, Rudiger, 1975. "A portfolio balance model of the open economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 1(1), pages 3-20, January.
  44. G. William Schwert, 1990. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  45. Serletis, A & Moustas, Z, 1997. "International Evidence on the Neutrality of Money," Papers, Calgary - Department of Economics 9704, Calgary - Department of Economics.
  46. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, American Finance Association, vol. 60(3), pages 1221-1257, 06.
  47. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 23(2), pages 177-200, March.
  48. Cynthia Harter, 2009. "Review of "Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism"," International Review of Economic Education, Economics Network, University of Bristol, Economics Network, University of Bristol, vol. 8(1), pages 155-157.
  49. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 244, Cowles Foundation for Research in Economics, Yale University.
  50. Marcellus Andrews, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, by George A. Akerlof and Robert J. Shiller," Challenge, M.E. Sharpe, Inc., vol. 52(5), pages 126-131, September.
  51. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  52. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
  53. L. Wade, 1988. "Review," Public Choice, Springer, Springer, vol. 58(1), pages 99-100, July.
  54. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  55. D. Wade Hands, 2010. "Stabilizing consumer choice: the role of 'true dynamic stability' and related concepts in the history of consumer choice theory," The European Journal of the History of Economic Thought, Taylor & Francis Journals, Taylor & Francis Journals, vol. 17(2), pages 313-343.
  56. Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers, Bank of England 393, Bank of England.
  57. Allen,Polly Reynolds & Kenen,Peter B., 1983. "Asset Markets and Exchange Rates," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521274067.
  58. Bridges, Jonathan & Thomas, Ryland, 2012. "The impact of QE on the UK economy – some supportive monetarist arithmetic," Bank of England working papers, Bank of England 442, Bank of England.
  59. Michael B. Devereux & Alan Sutherland, 2007. "Monetary Policy and Portfolio Choice Choice in an Open Economy Macro Model," Journal of the European Economic Association, MIT Press, MIT Press, vol. 5(2-3), pages 491-499, 04-05.
  60. Ozturk, 2006. "Exchange Rate Volatility and Trade: A Literature Survey," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 3(1), pages 85-102.
  61. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 7(1), pages 77-91, 03.
  62. Frederic S. Mishkin, 2001. "Financial Policies and the Prevention of Financial Crises in Emerging Market Countries," NBER Working Papers 8087, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc12:65402. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.