Alchemy of Financial Innovation: Securitization, Liquidity and Optimal Monetary Policy

Jungu Yang ()
Additional contact information
Jungu Yang: Economic Research Institute, Bank of Korea

No 2019-10, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper provides a theoretical model to explain how securitization affects the overall liquidity and welfare of an economy, an under-discussed area in the literature. By applying an overlapping generations model with random-relocation shocks, the effects of securitization are analyzed in three different hypothetical situations: 1. only one region of the economy issues securities, 2. all regions issue securities with the same capital productivity, and 3. all regions issue securities, but capital productivity is disparate across regions. Asset securitization plays a role in supplying alternative liquid assets (fiat money). As the economy can invest its resources more efficiently in high-yielding illiquid assets (capital) due to securitization, both consumption and welfare increase overall. Optimal monetary policy follows the Friedman rule in cases 1. and 2. However, the rule does not apply in case 3.

Keywords: Securitization; Liquidity; Friedman Rule; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E52 G11 G12 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2019-02-20
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2019-10.pdf Working Paper, 2019 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1910

Access Statistics for this paper

More papers in Working Papers from Economic Research Institute, Bank of Korea Contact information at EDIRC.
Bibliographic data for series maintained by Economic Research Institute ().