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

Stacey Schreft and Bruce Smith

No 94-10, Working Paper from Federal Reserve Bank of Richmond

Abstract: We examine a standard model of capital accumulation in 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 enhanced 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, contractionary monetary policy activity raises both the nominal rate of interest and the rate of inflation. Output can either rise or fall.

Keywords: Open market operations; Monetary policy (search for similar items in EconPapers)
Date: 1994
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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 (1995)
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