Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/19229 
Year of Publication: 
2004
Series/Report no.: 
HWWA Discussion Paper No. 257
Publisher: 
Hamburg Institute of International Economics (HWWA), Hamburg
Abstract: 
This paper reexamines the role of open market operations for short-run effects of monetary policy. Money demand is induced by a cash constraint, while the central bank supplies money exclusively in exchange for securities, discounted with a short-run nominal interest rate. We consider a legal restriction for open market operations by which only government bonds are eligible, whereas private debt is not accepted as collateral for money. Supply of eligible securities is bounded by assuming fiscal policy to ensure government solvency. The model provides an endogenous liquidity premium on noneligible assets and liquidity effects of money supply shocks regardless whether prices are flexible or set in a staggered way. Nominal interest rate policy is always associated with a uniquely determined price level and rational expectations equilibrium. It is further shown that an intuitive equivalence principle between money supply and interest rates arises in this case.
Subjects: 
Inside Money
Liquidity Puzzle
Risk-free Rate Puzzle
Ricardian Fiscal Policy
Price Level and Equilibrium Determinacy
JEL: 
E52
E32
Document Type: 
Working Paper

Files in This Item:
File
Size
322.03 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.