Optimal Central Bank Lending

Tinbergen Institute Discussion Paper 10-057/2

43 Pages Posted: 6 Aug 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 14, 2010


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 14, 2010). Tinbergen Institute Discussion Paper 10-057/2. Available at SSRN: https://ssrn.com/abstract=1653291 or http://dx.doi.org/10.2139/ssrn.1653291

Andreas Schabert (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923

University of Dortmund ( email )

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

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

Roetersstraat 11
Amsterdam, 1018 WB

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