On Default and Uniqueness of Monetary Equilibria

Li Lin, Dimitrios Tsomocos and Alexandros Vardoulakis
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Alexandros Vardoulakis: https://www.federalreserve.gov/econres/alexandros-vardoulakis.htm

No 2015-34, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. Positive default in every state of the world on some long-term loan endogenously creates positive liquid wealth that supports positive interest rates and resolves the aforementioned indeterminacy. Hence, a non-Ricardian policy across loan markets can determine the equilibrium allocations while it allows the central bank to earn profits from seigniorage in order to compensate for any losses.

Keywords: Collateral; Default; Determinacy; Liquid wealth; Monetary policy (search for similar items in EconPapers)
JEL-codes: D50 E40 E50 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2015-05-08
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.federalreserve.gov/econresdata/feds/2015/files/2015034pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.034 http://dx.doi.org/10.17016/FEDS.2015.034 (application/pdf)

Related works:
Journal Article: On default and uniqueness of monetary equilibria (2016)
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