Safe Assets, Liquidity and Monetary Policy

Pierpaolo Benigno and Salvatore Nisticò

No 9767, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest-rate spreads and can cause a deep recession cum deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.

Keywords: Liquidity crisis; Unconventional policies; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E30 E40 E50 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Safe Assets, Liquidity, and Monetary Policy (2017)
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