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  4. April 2017
  5. Safe Assets, Liquidity, and Monetary Policy

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Safe Assets, Liquidity, and Monetary Policy

  • Pierpaolo Benigno
  • Salvatore Nisticò
American Economic Journal: Macroeconomics
vol. 9, no. 2, April 2017
(pp. 182–227)
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Abstract

This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession-cum-deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.

Citation

Benigno, Pierpaolo, and Salvatore Nisticò. 2017. "Safe Assets, Liquidity, and Monetary Policy." American Economic Journal: Macroeconomics, 9 (2): 182–227. DOI: 10.1257/mac.20150073

Additional Materials

JEL Classification

  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
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