TY  - JOUR
AU  - Araújo, Aloísio
AU  - Schommer, Susan
AU  - Woodford, Michael
TI  - Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19711
PY  - 2013
Y2  - December 2013
DO  - 10.3386/w19711
UR  - http://www.nber.org/papers/w19711
L1  - http://www.nber.org/papers/w19711.pdf
N1  - Author contact info:
Aloisio Araujo
IMPA and FGV EPGE Brazilian School 
of Economics and Finance 
Praia de Botafogo 190 
Rio de Janeiro, RJ. 22250-900. 
Brazil
E-Mail: aloisio.araujo@fgv.br

Susan Schommer
Instituto Nacional de Matemática Pura e Aplicada
E-Mail: susan.schommer@gmail.com

Michael Woodford
Department of Economics
Columbia University
420 W. 118th Street
New York, NY 10027
Tel: 212/854-1094
Fax: 212-854-8059
E-Mail: mw2230@columbia.edu
M1  - published as Aloísio Araújo, Susan Schommer, Michael Woodford. "Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints," in Mark Gertler, organizer, "Lessons from the Financial Crisis for Monetary Policy" American Economic Journal: Macroeconomics, Volume 7, no. 1 (2015)

AB  - We consider the effects of central-bank purchases of a risky asset, financed by issuing riskless nominal liabilities (reserves), as an additional dimension of policy alongside "conventional" monetary policy (central-bank control of the riskless nominal interest rate), in a general-equilibrium model of asset pricing and risk sharing with endogenous collateral constraints of the kind proposed by Geanakoplos (1997). The existence of collateral constraints allows our model to capture the common view that large enough central-bank purchases would eventually have to affect asset prices. But even when central-bank purchases raise the price of the asset, owing to binding collateral constraints, the effects need not be the ones commonly assumed. We show that under some circumstances, central-bank purchases relax financial constraints, increase aggregate demand, and may even achieve a Pareto improvement; but in other cases, they may tighten financial constraints, reduce aggregate demand, and lower welfare. The latter case is almost certainly the one that arises if central-bank purchases are sufficiently large.
ER  -