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Welfare-Enhancing Distributional Effects of Central Bank Asset Purchases

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  • Andreas Schabert
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    This paper shows that central bank interventions in secondary markets for private debt can enhance social welfare. We apply a model with idiosyncratic risk and limited contract enforcement, while abstracting from unusually large disruptions in financial market. By purchasing debt at above-market prices the central bank induces an increase in credit supply, by which rather borrowers than debt holders gain. We show that asset purchases can not only replicate a tax/subsidy that addresses pecuniary externalities induced by a collateral constraint, but can even improve upon the constrained efficient allocation. We further demonstrate that countercyclical asset purchases are desirable under aggregate risk, which reduce the build-up of debt in favorable times.

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    File URL: http://ockenfels.uni-koeln.de/fileadmin/wiso_fak/stawi-ockenfels/pdf/wp_series_download/wp0094.pdf
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    Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 94.

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    Date of creation: 02 Jun 2017
    Handle: RePEc:kls:series:0094
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