Monetary policy, interest rates, and liquidity premia
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Date
2012-08-06
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Abstract
We augment a standard macroeconomic model by accounting for the fact that central banks supply money
only in exchange for eligible assets. Monetary policy
implementation then matters for the pass-through of
policy rate changes and rationalizes liquidity premia on
treasuries. The model explains the observed negative
relation between corporate bond yield spreads and the
amount of available treasuries. Liquidity premia on eligible assets further provide a structural explanation for
the systematic wedge between the policy rate and the
consumption Euler rate that standard models equate.
Nonetheless, monetary policy effects on real activity and
inflation are consistent with broad empirical evidence.
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Keywords
consumption Euler rate, monetary policy transmission, open market operations, treasury debt liquidity premium