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Real consequences of open market operations: the role of limited commitment

Francesco Carli and Pedro Gomis Porqueras
Authors registered in the RePEc Author Service: Pedro Gomis-Porqueras

MPRA Paper from University Library of Munich, Germany

Abstract: We study how limited commitment in credit markets affects the implementation of open market operations and characterize when they result in real indeterminacies and when they have real effects. To do so, we consider a frictional and incomplete market framework where agents face stochastic trading opportunities and limited commitment in some markets. When limited commitment does not constraint agents’ choices, we find necessary and sufficient conditions for the existence of a unique monetary equilibrium. However, real indeterminacies are possible when buyers face a binding no-default constraint. We also show that when the no-default constraint binds and bonds are not priced fundamentally, open market operations generically have real effects. A sale of government bonds can increase or decrease interest rates, depending on the nature of equilibria. The direction of the interest rate effects critically depend on the size of the liquidity premium on government bonds. Finally, government bonds purchases can be used to rule out real indeterminacies, thus finding another rationale for such policy.

Keywords: taxes; inflation; liquidity premium. (search for similar items in EconPapers)
JEL-codes: E26 E40 E61 H21 (search for similar items in EconPapers)
Date: 2019-05-21
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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