Modeling Monetary Policy

Samuel Reynard and Andreas Schabert

No 09-094/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We develop a macroeconomic framework where money issupplied against only few eligible securities in open marketoperations. The relationship between the policy rate,expected inflation and consumption growth is affected bymoney market conditions, i.e. the varying liquidity value ofeligible assets and the associated risk. This induces a liquiditypremium, which explains the observed systematic wedgebetween the policy rate and consumption Euler interest ratethat standard models equate. It further implies a dampenedresponse of consumption to policy rate shocks that is humpshapedwhen we account for realistic central bank transfersand the dynamics of bond holdings.

Keywords: Monetary policy; Open market operations; Liquidity (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 E58 (search for similar items in EconPapers)
Date: 2009-11-10
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Modeling Monetary Policy (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20090094

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