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Optimal monetary policy in a collateralized economy

Author

Listed:
  • Gary Gorton

    (Yale University and NBER)

  • Ping He

    (Tsinghua University)

Abstract

Collateral plays a real role in an economy. Mortgage-backed and asset-backed securities (MBS/ABS) produced by the private sector are imperfect substitutes for Treasuries as collateral. The ratio of MBS/ABS to Treasuries is positively related to financial fragility because privately-produced collateral is risky. We analyze optimal central bank policy in a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.

Suggested Citation

  • Gary Gorton & Ping He, 2023. "Optimal monetary policy in a collateralized economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(1), pages 55-89, January.
    • Handle: RePEc:spr:joecth:v:75:y:2023:i:1:d:10.1007_s00199-021-01390-5
    DOI: 10.1007/s00199-021-01390-5
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    Cited by:

    1. Benchimol, Jonathan & Ivashchenko, Sergey, 2021. "Switching volatility in a nonlinear open economy," Journal of International Money and Finance, Elsevier, vol. 110(C).
    2. Petrevski, Goran, 2023. "Determinants of Inflation Targeting: A Survey of Empirical Literature," EconStor Preprints 271121, ZBW - Leibniz Information Centre for Economics.
    3. Vítor Constâncio, 2020. "The return of fiscal policy and the euro area fiscal rule," Working Papers REM 2020/0127, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    4. Cassola, Nuno & Koulischer, François, 2019. "The collateral channel of open market operations," Journal of Financial Stability, Elsevier, vol. 41(C), pages 73-90.
    5. Vítor Constâncio, 2020. "The Return of Fiscal Policy and the Euro Area Fiscal Rule," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 358-372, September.
    6. Petrevski, Goran, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," EconStor Preprints 271122, ZBW - Leibniz Information Centre for Economics.
    7. Stanley Fischer, 2016. "Reflections on Macroeconomics Then and Now," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 51(3), pages 133-141, July.
    8. Gary B. Gorton, 2016. "The History and Economics of Safe Assets," NBER Working Papers 22210, National Bureau of Economic Research, Inc.
    9. Becker, Christoph, 2021. "The liquidity mechanics of dealer banks in the market-based credit system," Economic Modelling, Elsevier, vol. 105(C).
    10. Vítor Constâncio, 0. "The Return of Fiscal Policy and the Euro Area Fiscal Rule," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 0, pages 1-15.

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    More about this item

    Keywords

    Collateral; Monetary policy; Financial fragility; Open market operations;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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