TY - JOUR
T1 - Real consequences of open market operations
T2 - the role of limited commitment
AU - Carli, Francesco
AU - Gomis-Porqueras, Pedro
N1 - Funding Information:
☆ We would like to acknowledge the associate editor and anonymous referees for their feedback and suggestions. We like to thank Aleks Berentsen, Jonathan Chiu, Charles Kahn, Mohammed Ait-Lahcen, James MacGee, and Stephen Williamson for their comments and suggestions. We would also like to thank seminar participants at Western University, Monash University, University of Queensland, Universitat Autónoma de Barcelona, the 2017 North American Econometric Society summer meetings, the 2018 Lisbon Meetings in Game Theory and Applications, the 2018 Society for Economic Measurement meetings, the 2019 workshop of the DBS-SWUFE Center for Banking and Financial Stability, the 2019 Society for Advancement of Economic Theory Conference, and the conference in honor of Bruce Smith at the University of Texas at Austin. All errors are ours.
Publisher Copyright:
© 2020 Elsevier B.V.
PY - 2021/2
Y1 - 2021/2
N2 - We study how limited commitment in credit markets affects the implementation of open market operations and characterize when they result in real indeterminacies and when they have real effects. To do so, we consider a frictional and incomplete market framework where agents face stochastic trading opportunities and limited commitment. We find necessary and sufficient conditions for the existence of a unique stationary monetary equilibrium when limited commitment does not restrict agent's choices. However, real indeterminacies are possible when buyers face a binding no-default constraint. When the endogenous borrowing limit binds and bonds are not priced fundamentally, open market operations generically have real effects. A sale of government bonds can increase or decrease interest rates, depending on the nature of the equilibria. These phenomena are consistent with what is observed in the US. Moreover, when multiple equilibria exists welfare is larger at the steady state with a lower liquidity premium on government debt. Finally, government bond purchases can be used to rule out real indeterminacies, thus finding another rationale for such policy.
AB - We study how limited commitment in credit markets affects the implementation of open market operations and characterize when they result in real indeterminacies and when they have real effects. To do so, we consider a frictional and incomplete market framework where agents face stochastic trading opportunities and limited commitment. We find necessary and sufficient conditions for the existence of a unique stationary monetary equilibrium when limited commitment does not restrict agent's choices. However, real indeterminacies are possible when buyers face a binding no-default constraint. When the endogenous borrowing limit binds and bonds are not priced fundamentally, open market operations generically have real effects. A sale of government bonds can increase or decrease interest rates, depending on the nature of the equilibria. These phenomena are consistent with what is observed in the US. Moreover, when multiple equilibria exists welfare is larger at the steady state with a lower liquidity premium on government debt. Finally, government bond purchases can be used to rule out real indeterminacies, thus finding another rationale for such policy.
KW - Inflation
KW - Liquidity premium
KW - Taxes
UR - https://www.scopus.com/pages/publications/85098065103
U2 - 10.1016/j.euroecorev.2020.103639
DO - 10.1016/j.euroecorev.2020.103639
M3 - Article
AN - SCOPUS:85098065103
SN - 0014-2921
VL - 132
JO - European Economic Review
JF - European Economic Review
M1 - 103639
ER -