Modeling Monetary Policy

Tinbergen Institute Discussion Paper TI 09-094/2

40 Pages Posted: 20 Dec 2009

See all articles by Samuel Reynard

Samuel Reynard

Swiss National Bank

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Date Written: November 9, 2009

Abstract

We develop a macroeconomic framework where money is supplied against only few eligible securities in open market operations. The relationship between the policy rate, expected inflation and consumption growth is affected by money market conditions, i.e. the varying liquidity value of eligible assets and the associated risk. This induces a liquidity premium, which explains the observed systematic wedge between the policy rate and consumption Euler interest rate that standard models equate. It further implies a dampened response of consumption to policy rate shocks that is humpshaped when we account for realistic central bank transfers and the dynamics of bond holdings.

Keywords: Monetary Policy, Open market operations, Liquidity

JEL Classification: E52, E58, E43, E32

Suggested Citation

Reynard, Samuel and Schabert, Andreas, Modeling Monetary Policy (November 9, 2009). Tinbergen Institute Discussion Paper TI 09-094/2. Available at SSRN: https://ssrn.com/abstract=1504537 or http://dx.doi.org/10.2139/ssrn.1504537

Samuel Reynard (Contact Author)

Swiss National Bank ( email )

Boersenstrasse 15
Zurich, 8022
Switzerland

Andreas Schabert

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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