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The Effects of Open Market Operations in a Model of Intermediation and GrowthStacey L. Schreft |
Abstract This article presents a monetary growth model in which spatial separation and limited communication create a role for banks. Monetary policy interacts with the financial system's liquidity provision to affect the existence, multiplicity, and dynamical properties of equilibria. Moderate levels of risk aversion and tight monetary policy can lead to multiple steady rates. Dynamical equilibria can be indeterminate, with oscillatory paths. Thus financial market frictions are a source of indeterminacies and endogenous volatility. Under plausible conditions, tight monetary policy raises the nominal interest rate and inflation rate and reduces long-run output. Thus, a central bank's liquidity provision can promote growth. Stacey L. Schreft is a senior economist at the Federal Reserve Bank of Kansas City. Bruce D. Smith is a professor of economics at the University of Texas at Austin. The authors would like to thank Patrick Bolton, Ian Jewitt, and four anonymous referees for their extremely helpful comments on the paper. The views expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Banks of Minneapolis or Kansas City, or the Federal Reserve System.Schreft e-mail: stacey.schreft@kc.frb.org
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