Central Bank Purchases of Private Assets: An Evaluation
46 Pages Posted: 16 Aug 2017 Last revised: 4 Sep 2018
Date Written: December 19, 2016
We develop a model of asset exchange and monetary policy, augmented to incorporate a housing market and a frictional financial market. Homeowners take out mortgages with banks using their residential properties as collateral to finance consumption. Banks use mortgages and government liabilities as collateral to secure deposit contracts, but they have an incentive to fake the quality of mortgages at a cost. Quantitative easing (QE) in the form of central bank purchases of mortgages from private banks has effects on the composition of assets in the economy, and on the incentive structure of the private sector. When the incentive problem is severe, the central bank can unambiguously improve welfare by purchasing mortgages. However, when it is not severe, the central bank’s mortgage purchases cause a housing construction boom and sometimes can lower exchange in the economy, hence reducing welfare.
Keywords: Quantitative easing, Monetary policy, Collateral, Frauds
JEL Classification: D8, D53, E5, E44
Suggested Citation: Suggested Citation