Unconventional Optimal Repurchase Agreements
We build a model in which verifiability of private debts and timing mismatch in debt settlements lead to liquidity problem in the financial market. The central bank can respond to the liquidity problem by adopting an unconventional monetary policy that resembles repurchase agreements between the central bank and the lenders. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the limited participation is driven by a real shock (i.e., preference shock).
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