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The safe asset, banking equilibrium, and optimal central bank monetary, prudential and balance-sheet policies

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  • Magill, Michael
  • Quinzii, Martine
  • Rochet, Jean-Charles

Abstract

A simple equilibrium model is presented which permits the joint study of optimal Central Bank prudential, monetary and balance sheet policies in the pre and post 2008 Crisis periods. It explains the new policies—the purchase of risky securities (QE), payment of interest on reserves (IR) and use of reverse repo (RRP)—as the response to the lack of safe assets in the economy, and shows why these policies were not needed to achieve optimality before 2008, but were needed for the 2008 Crisis and thereafter.

Suggested Citation

  • Magill, Michael & Quinzii, Martine & Rochet, Jean-Charles, 2020. "The safe asset, banking equilibrium, and optimal central bank monetary, prudential and balance-sheet policies," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 113-128.
    • Handle: RePEc:eee:moneco:v:112:y:2020:i:c:p:113-128
    DOI: 10.1016/j.jmoneco.2019.02.002
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    More about this item

    Keywords

    Banking equilibrium; Capital requirements; Prudential policy; Monetary policy; Balance sheet policy; Quantitative easing; Interest on reserves;
    All these keywords.

    JEL classification:

    • D - Microeconomics
    • D - Microeconomics
    • E - Macroeconomics and Monetary Economics
    • G - Financial Economics
    • G - Financial Economics

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