Optimal monetary policy in a collateralized economy

Gary Gorton () and Ping He
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Gary Gorton: Yale University and NBER

Economic Theory, 2023, vol. 75, issue 1, No 3, 55-89

Abstract: Abstract Collateral plays a real role in an economy. Mortgage-backed and asset-backed securities (MBS/ABS) produced by the private sector are imperfect substitutes for Treasuries as collateral. The ratio of MBS/ABS to Treasuries is positively related to financial fragility because privately-produced collateral is risky. We analyze optimal central bank policy in a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.

Keywords: Collateral; Monetary policy; Financial fragility; Open market operations (search for similar items in EconPapers)
JEL-codes: E32 E5 E52 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Optimal Monetary Policy in a Collateralized Economy (2016)
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DOI: 10.1007/s00199-021-01390-5

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