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Large Scale Asset Purchases with Segmented Mortgage and Corporate Loan Markets

Author Info

  • Meixing Dai

    ()

    (BETA, University of Strasbourg)

  • Frédéric Dufourt

    ()

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS)

  • Qiao Zhang

    ()

    (BETA, University of Strasbourg)

Abstract

We introduce Large Scale Asset Purchases (LSAPs) in a New-Keynesian DSGE model that features distinct mortgage and corporate loan markets. We show that following a significant disruption of financial intermediation, central-bank purchases of mortgage-backed securities (MBS) are uniformly less effective at easing credit market conditions and stabilizing economic activity than outright purchases of corporate bonds. Moreover, the size of the effects crucially depends on the extent to which credit markets are segmented, i.e. to which a "portfolio balance channel" is at work in the economy. More segmented credit markets imply larger, but more local effects of particular asset purchases. With strongly segmented credit markets, large scale purchases of MBS are useful to stabilize the housing market but do little to mitigate the contractionary effect of the crisis on employment and output.

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File URL: http://www.amse-aixmarseille.fr/sites/default/files/_dt/2012/wp_2013_-_nr_36.pdf
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Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1336.

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Length: 37 pages
Date of creation: Mar 2013
Date of revision: Jun 2013
Handle: RePEc:aim:wpaimx:1336
Contact details of provider: Web page: http://www.amse-aixmarseille.fr/en

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Keywords: Financial frictions; mortgage-backed securities (MBS); corporate bonds; unconventional monetary policy; large scale asset purchases (LSAPs); portfolio balance channel; credit spreads.;

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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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  1. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
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  9. Mark Gertler & Peter Karadi, 2013. "QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 5-53, January.
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  11. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2," 2011 Meeting Papers 982, Society for Economic Dynamics.
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  16. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The central bank should be sector-agnostic
    by Economic Logician in Economic Logic on 2013-09-18 14:16:00
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Cited by:

  1. Valentin Jouvanceau, 2016. "The Portfolio Rebalancing Channel of Quantitative Easing," Working Papers 1625, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Walentin, Karl, 2013. "Business Cycle Implications of Mortgage Spreads," Working Paper Series 275, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.

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