This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession- cum-deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.
Safe assets, liquidity, and monetary policy / Benigno, Pierpaolo; Nisticò, Salvatore. - In: AMERICAN ECONOMIC JOURNAL. MACROECONOMICS. - ISSN 1945-7707. - 9:2(2017), pp. 182-227. [10.1257/mac.20150073]
Safe assets, liquidity, and monetary policy
BENIGNO, PIERPAOLO;NISTICO', SALVATORE
2017
Abstract
This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession- cum-deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.
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