Journal Article

The Effects of Open Market Operations in a Model of Intermediation and Growth

Stacey L. Schreft and Bruce D. Smith

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 65, issue 3, pages 519-550
Published in print July 1998 | ISSN: 0034-6527
Published online July 1998 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00056
The Effects of Open Market Operations in a Model of Intermediation and Growth

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This article presents a monetary growth model where 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 states. 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.

Journal Article.  0 words. 

Subjects: Economics

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