What Is in a Name? Purchases and Sales of Financial Assets as a Monetary Policy Instrument

Ronald Mau

Journal of Money, Credit and Banking, 2023, vol. 55, issue 6, 1507-1533

Abstract: This paper studies optimal interest rate and balance sheet policy in a quantitative New Keynesian model with a constrained financial sector, considering commitment versus discretion in monetary policy design and fixing either instrument. Optimal interest rate policy under commitment (discretion) achieves 93.0% (82.6%) of the potential gains to dual instrument monetary policy under commitment. Optimal discretionary dual instrument policy eliminates the cost of commitment limitations and exhibits no inflationary bias. Under commitment, the optimal balance sheet policy eliminates the cost of suboptimal interest rate policy, for example, an interest rate peg. Finally, I compare optimal policies to implementable rules‐based policies.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:55:y:2023:i:6:p:1507-1533

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