Optimal Monetary Policy, Asset Purchases, and Credit Market Frictions

41 Pages Posted: 23 Oct 2014

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

Date Written: October 15, 2014

Abstract

This paper examines how credit market frictions affect optimal monetary policy and if there is a role for central bank asset purchases. 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. We show that the central bank cannot implement the first best allocation and that optimal monetary policy mainly aims at stabilizing prices when only a single instrument is available. The central bank can however mitigate the credit market distortion in a welfare-enhancing way by purchasing loans at a favorable price, which relies on rationing the supply of money.

Keywords: optimal monetary policy, borrowing constraints, nominal rigidities, central bank asset purchases, money rationing

JEL Classification: E4, E5, E32

Suggested Citation

Schabert, Andreas, Optimal Monetary Policy, Asset Purchases, and Credit Market Frictions (October 15, 2014). ECB Working Paper No. 1738. Available at SSRN: https://ssrn.com/abstract=2510424

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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