4 - Open-market policies and liquidity
Published online by Cambridge University Press: 05 January 2013
Summary
In the real world, there are many channels through which a banking system may influence economic activity by implementing a specific monetary policy. One way, which was considered in the previous two chapters, is to intervene on the credit market by trying to manipulate the cost of borrowing, or the amount of money that is created when granting loans to the private sector. Another way, which we shall study presently, is the Bank's attempts to influence the economy's liquidity by exchanging illiquid assets such as long-term bonds for liquid assets such as short-term bonds or money.
The model we shall use to take this kind of phenomenon into account is quite simple, and bears some resemblance to popular Keynesian macroeconomic models. The real part of the model is the same as that in the previous chapters. As in Chapter 1, consumers have to decide in each period how much to consume and to save (no borrowing is allowed). But consumers can now save by holding two sorts of assets instead of one: paper money and perpetuities, both of which are issued by a governmental agency, the Bank. In such a context, the Bank can in principle engage in open-market operations by trading perpetuities for money, and vice versa. In particular, the Bank may wish to peg the interest rate, i.e., the reciprocal of the money price of perpetuities, or the money supply.
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- Information
- Money and ValueA Reconsideration of Classical and Neoclassical Monetary Economics, pp. 122 - 149Publisher: Cambridge University PressPrint publication year: 1983