Safe Assets, Liquidity, and Monetary Policy

Pierpaolo Benigno and Salvatore Nisticò

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 2, 182-227

Abstract: This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession-cum-deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.

JEL-codes: E31 E32 E43 E44 E52 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20150073
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Citations: View citations in EconPapers (20)

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Working Paper: Safe Assets, Liquidity and Monetary Policy (2013)
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