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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 D. Smith

Abstract

This article presents a monetary growth model where 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 states. 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 D. Smith, 1998. "The Effects of Open Market Operations in a Model of Intermediation and Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(3), pages 519-550.
    • Handle: RePEc:oup:restud:v:65:y:1998:i:3:p:519-550.
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00056
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