Frictional asset markets and the liquidity channel of monetary policy

Lucas Herrenbrueck

Journal of Economic Theory, 2019, vol. 181, issue C, 82-120

Abstract: How do central bank purchases of illiquid assets affect asset prices and the real economy? To answer this question, I construct a model with heterogeneous households – some households need money more urgently than others and thus hold more of it. Households (and the government) can trade in frictional asset markets. I find that open market purchases are fundamentally different from helicopter drops: asset purchases stimulate private demand for consumption goods at the expense of demand for assets, while helicopter drops do the reverse. When assets are already scarce, further purchases crowd out the private flow of funds and can cause high real yields and disinflation – a liquidity trap.

Keywords: Monetary theory; Monetary policy; Financial frictions; Indirect asset liquidity; Liquidity trap; Quantitative easing (search for similar items in EconPapers)
JEL-codes: E31 E40 E50 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053119300134
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:181:y:2019:i:c:p:82-120

DOI: 10.1016/j.jet.2019.02.003

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().