Optimal monetary policy, asset purchases, and credit market frictions

Andreas Schabert

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: We examine how borrowing constraints affect monetary transmission and the trade-off of a welfare maximizing central bank. 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, while the distortion is amplified under higher nominal interest rates. We show that the central bank cannot implement first best and that optimal monetary policy mainly aims at stabilizing prices. We further demonstrate that central bank purchases of loans can alleviate the borrowing constraint and enhance social welfare.

JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Working Paper: Optimal monetary policy, asset purchases, and credit market frictions (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100619

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