Monetary policy trade-offs in a portfolio model with endogenous asset supply

Stefan Schüder

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers finance capital goods through credit and bonds in accordance with debt capital costs as well as through equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the real exchange rate. Within this general equilibrium model, it can be shown that expansive monetary interventions, being applied throughout the course of economic crises, stabilise the real amount of domestic investments at the cost of inflation, currency devaluation, distortions of interest rates, and risk clusters on the central bank’s balance sheet. Furthermore, through exchange rate stabilising interventions, the central bank is able to stabilise the real amount of domestic investments and in turn the main goal of exchange rate stabilisation is also achieved. However, either risk clusters on central bank’s balance sheet or changes in the domestic price level emerge. This consequently results in both types of central bank interventions promoting an inefficient international allocation of real capital investments.

Keywords: portfolio balance; monetary policy; macroeconomic risk; exchange rate; real capital investments (search for similar items in EconPapers)
JEL-codes: E10 E44 E52 (search for similar items in EconPapers)
Date: 2011-06-25
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Published in Center for European, Governance and Economic Development Research Discussion Paper 127 (2011): pp. 1-53

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https://mpra.ub.uni-muenchen.de/32019/1/MPRA_paper_32019.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/34652/2/MPRA_paper_34652.pdf revised version (application/pdf)

Related works:
Working Paper: Monetary Policy Trade-Offs in a Portfolio Model with Endogenous Asset Supply (2012)
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