Optimal Monetary Interventions in Credit Markets

Tai-Wei Hu and Luis Araujo ()
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Tai-Wei Hu: MEDS

No 176, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: In an environment based on Lagos and Wright (2005) but with two rounds of pairwise meetings, we introduce imperfect monitoring that resembles operations of unsecured loans. We characterize the set of implementable allocations satisfying individual rationality and pairwise core in bilateral meetings. We introduce a class of expansionary monetary policies that use the seignorage revenue to purchase privately issued debts that resemble unconventional monetary policies. We show that under the optimal trading mechanism, both money and debt circulate in the economy and the optimal inflation rate is positive, except for very high discount factors under which money alone achieves the first-best. Our model captures the view that unconventional monetary policy encourages lending while it may create inflation.

Date: 2015
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Citations: View citations in EconPapers (4)

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Journal Article: Optimal monetary interventions in credit markets (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:176

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