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Optimal monetary policy, asset purchases, and credit market frictions

Andreas Schabert

No 1738, Working Paper Series from European Central Bank

Abstract: This paper examines how credit market frictions affect optimal monetary policy and if there is a role for central bank asset purchases. We develop a sticky price model where money serves as the means of payment and ex-ante identical agents borrow/lend among each other. The credit market is distorted as borrowing is constrained by available collateral. We show that the central bank cannot implement the first best allocation and that optimal monetary policy mainly aims at stabilizing prices when only a single instrument is available. The central bank can however mitigate the credit market distortion in a welfare-enhancing way by purchasing loans at a favorable price, which relies on rationing the supply of money. JEL Classification: E4, E5, E32

Keywords: borrowing constraints; central bank asset purchases; money rationing; nominal rigidities; optimal monetary policy (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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