The effects of open market operations in a model of intermediation and growth

Stacey Schreft and Bruce Smith

No 562, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We examine an otherwise standard model of capital accumulation to which spatial separation and limited communication create a role for money and shocks to portfolio needs create a role for banks. In this context we examine the existence, multiplicity, and dynamical properties of monetary equilibria with positive nominal interest rates. Moderate levels of risk aversion can lead to the existence of multiple monetary steady states, all of which can be approached from a given set of initial conditions. In addition, even if there is a unique monetary steady state, monetary equilibria can be indeterminate, and oscillatory equilibrium paths can be observed. Thus financial market frictions are a potential source of both indeterminacies and endogenously arising economic volatility. ; We also consider the consequences of monetary policy actions that rearrange the composition of government liabilities. Contractionary monetary policy activities can have complicated consequences, depending especially on the nature of the steady state equilibrium that obtains when there are multiple steady states. Under plausible conditions, however, a permanent contractionary change in monetary policy raises both the nominal rate of interest and the rate of inflation, and reduces long-run output levels. Thus liquidity provision by a central bank - just as by the banking system as a whole - can be growth promoting. Loose monetary policy also is conducive to avoiding development trap phenomena.

Keywords: Open; market; operations (search for similar items in EconPapers)
Date: 1995
References: Add references at CitEc
Citations:

Published in Review of Economic Studies (Vol. 65, No. 3, July 1998, pp. 519-550)

Downloads: (external link)
http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=620 (application/pdf)
http://www.minneapolisfed.org/research/WP/WP562.pdf

Related works:
Journal Article: The Effects of Open Market Operations in a Model of Intermediation and Growth (1998)
Working Paper: The effects of open market operations in a model of intermediation and growth (1997)
Working Paper: The effects of open market operations in a model of intermediation and growth (1994)
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:fip:fedmwp:562

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().