Aggregate Liquidity Management

Todd Keister and Daniel Sanches

No 16-32, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: It has been largely acknowledged that monetary policy can affect borrowers and lenders differently. This paper investigates whether the distributional effects of monetary policy are an inherent feature of monetary economies with private credit instruments. In our framework, both money and credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs have access to productive projects but face credit constraints due to limited pledgeability of their returns. Monetary policy affects the liquidity premium on private credit and thereby influences the cost of borrowing and the level of investment, but any attempt to ease borrowing constraints results in suboptimal decentralized-market trading activity. We show that this policy trade-off is not an inherent feature of monetary economies with private credit instruments. If we consider a richer set of aggregate liquidity management instruments, such as the payment of interest on inside money and capital requirements, it is possible to implement an efficient allocation.

Keywords: monetary theory and policy; liquidity premium; Friedman rule; investment; bank lending channel (search for similar items in EconPapers)
Pages: 33 pages
Date: 2016-11-25
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac, nep-mon and nep-ppm
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Citations: View citations in EconPapers (1)

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