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Replumbing Our Financial System: Uneven Progress


  • Darrell Duffie

    (Graduate School of Business, Stanford University)


We introduce large-scale asset purchases (LSAPs) as a monetary policy tool within a macroeconomic model.We allow for purchases of both long-term government bonds and securities with some private risks. We argue that LSAPs should be thought of as central bank intermediation that can affect the economy to the extent there exist limits to arbitrage in private intermediation. We then build a model with limits to arbitrage in banking that vary countercyclically and where the frictions are greater for private securities than for government bonds. We use the framework to study the impact of LSAPs that have the broad features of the different quantitative easing (QE) programs the Federal Reserve pursued over the course of the crisis. We find that (i) LSAPs work in the model in a way mostly consistent with the evidence; (ii) purchases of securities with some private risk have stronger effects than purchases of government bonds; (iii) the effects of the LSAPs depend heavily on whether the zero lower bound is binding. Our model does not rely on the central bank having a more efficient intermediation technology than the private sector: We assume the opposite.

Suggested Citation

  • Darrell Duffie, 2013. "Replumbing Our Financial System: Uneven Progress," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 251-280, January.
  • Handle: RePEc:ijc:ijcjou:y:2013:q:0:a:12

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    References listed on IDEAS

    1. Adam Copeland & Antoine Martin & Michael Walker, 2010. "The tri-party repo market before the 2010 reforms," Staff Reports 477, Federal Reserve Bank of New York.
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    Cited by:

    1. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
    2. Lucas Marc Fuhrer & Basil Guggenheim & Silvio Schumacher, 2016. "Re‐Use of Collateral in the Repo Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1169-1193, September.
    3. repec:eee:finsta:v:33:y:2017:i:c:p:311-330 is not listed on IDEAS
    4. repec:cup:jfinqa:v:52:y:2017:i:05:p:2183-2215_00 is not listed on IDEAS
    5. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.
    6. Cruz Lopez, Jorge A. & Harris, Jeffrey H. & Hurlin, Christophe & Pérignon, Christophe, 2017. "CoMargin," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(05), pages 2183-2215, October.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation


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