Liquidity, Quantitative Easing and Optimal Monetary Policy

Engin Kara and Jasmin Sin

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: We investigate optimal monetary policy design using a New Keynesian model that accommodates liquidity frictions. In this model, unlike the standard New Keynesian model, the central bank faces a trade-off between inflation and output stabilisation. Optimal policy requires a temporary deviation from price stability in response to a negative shock to the liquidity of private financial assets. We find that quantitative easing improves the trade-off between inflation and output by improving liquidity conditions in the economy.

Keywords: DSGE Models; Optimal Monetary Policy; liquidity; quantitative easing (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:13/635

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