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Real consequences of open market operations: the role of limited commitment

Author

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  • Carli, Francesco
  • Gomis Porqueras, Pedro

Abstract

We study how limited commitment in credit markets affects the implementation of open market operations and characterize when they result in real indeterminacies and when they have real effects. To do so, we consider a frictional and incomplete market framework where agents face stochastic trading opportunities and limited commitment in some markets. When limited commitment does not constraint agents’ choices, we find necessary and sufficient conditions for the existence of a unique monetary equilibrium. However, real indeterminacies are possible when buyers face a binding no-default constraint. We also show that when the no-default constraint binds and bonds are not priced fundamentally, open market operations generically have real effects. A sale of government bonds can increase or decrease interest rates, depending on the nature of equilibria. The direction of the interest rate effects critically depend on the size of the liquidity premium on government bonds. Finally, government bonds purchases can be used to rule out real indeterminacies, thus finding another rationale for such policy.

Suggested Citation

  • Carli, Francesco & Gomis Porqueras, Pedro, 2019. "Real consequences of open market operations: the role of limited commitment," MPRA Paper 94088, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:94088
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    File URL: https://mpra.ub.uni-muenchen.de/94088/1/MPRA_paper_94088.pdf
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    References listed on IDEAS

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    1. Real consequences of open market operations: the role of limited commitment
      by Christian Zimmermann in NEP-DGE blog on 2019-08-04 13:31:07

    More about this item

    Keywords

    taxes; inflation; liquidity premium.;

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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