Optimal Central Bank Lending

43 Pages Posted: 28 Jun 2010

See all articles by Andreas Schabert

Andreas Schabert

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 28, 2010

Abstract

We analyze optimal monetary policy in a sticky price model where the central bank supplies money outright via asset purchases and lends money temporarily against collateral. The terms of central bank lending affect rationing of money and impact on macroeconomic aggregates. The central bank can set the policy rate and its inflation target in a way that implements the first best long-run allocation, which is impossible if money were supplied in a lump-sum way (as commonly assumed). Efficient central bank lending further increases gains from macroeconomic stabilization beyond pure interest rate policy. This requires departing from a “Treasuries-only” regime.

Keywords: Optimal monetary policy, central bank instruments, collateralized lending, liquidity premium, inflation

JEL Classification: E4, E5, E32

Suggested Citation

Schabert, Andreas, Optimal Central Bank Lending (June 28, 2010). Available at SSRN: https://ssrn.com/abstract=1631937 or http://dx.doi.org/10.2139/ssrn.1631937

Andreas Schabert (Contact Author)

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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