Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/319991 
Authors: 
Year of Publication: 
2016
Series/Report no.: 
CASMEF Working Paper Series No. WP 2016/05
Publisher: 
LUISS Guido Carli, Department of Economics and Finance, Arcelli Centre for Monetary and Financial Studies, Rome
Abstract: 
The article shows that expansionary open-market operations are non-neutral, even with price flexibility, when the purchased assets are partially liquid. A permanent injection of money generates a realbalance effect that helps monetary transactions, reduces consumption inequality and, by this way, increases social welfare. The mechanism is effective when the economy is trapped in a stationary equilibrium with an abundant supply of high-yield assets, which also implies extreme consumption inequality - as at the sunrise of the Great Recession. Improving on this equilibrium requires the asset purchases by the central bank or, equivalently, a fall in the supply of partially-liquid assets, which reduce consumption inequality - as observed during the Great Recession. To establish the result, I borrow the Williamson (2012)'s model and return it back with a financial contract that efficiently insures individuals against their uncertain demands for liquidity. Compared to the original contract, the new arrangement enlarges the Pareto frontier to allocations with higher social welfare.
Document Type: 
Working Paper

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