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Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints

Aloisio Araujo, Susan Schommer and Michael Woodford ()

No 19711, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider the effects of central-bank purchases of a risky asset, financed by issuing riskless nominal liabilities (reserves), as an additional dimension of policy alongside "conventional" monetary policy (central-bank control of the riskless nominal interest rate), in a general-equilibrium model of asset pricing and risk sharing with endogenous collateral constraints of the kind proposed by Geanakoplos (1997). The existence of collateral constraints allows our model to capture the common view that large enough central-bank purchases would eventually have to affect asset prices. But even when central-bank purchases raise the price of the asset, owing to binding collateral constraints, the effects need not be the ones commonly assumed. We show that under some circumstances, central-bank purchases relax financial constraints, increase aggregate demand, and may even achieve a Pareto improvement; but in other cases, they may tighten financial constraints, reduce aggregate demand, and lower welfare. The latter case is almost certainly the one that arises if central-bank purchases are sufficiently large.

JEL-codes: D53 E52 E58 (search for similar items in EconPapers)
Date: 2013-12
Note: EFG ME
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Published as Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints , Aloísio Araújo, Susan Schommer, Michael Woodford. in Lessons from the Financial Crisis for Monetary Policy , Gertler. 2015
Published as Aloísio Araújo & Susan Schommer & Michael Woodford, 2015. "Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 1-43, January.

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Journal Article: Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints (2015) Downloads
Working Paper: Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints (2014) Downloads
Chapter: Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints (2013)
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