Unconventional Optimal Open Market Purchases

Chao Gu and Joseph Haslag

Review of Economic Dynamics, 2014, vol. 17, issue 3, 543-558

Abstract: We build a model in which verifiability of private debt and a timing mismatch in debt settlements can lead to a liquidity problem in the financial market. The central bank can respond to the liquidity problem by adopting an unconventional monetary policy that purchases private debts in the open market. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the limited participation is driven by a real shock (i.e., preference shock). (Copyright: Elsevier)

Keywords: Unconventional monetary policy; Liquidity problem; Timing mismatch; Leveraging; Liquidity shock; Settlement risk; Consumption shock (search for similar items in EconPapers)
JEL-codes: E44 E52 G01 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1016/j.red.2013.08.004

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