Limited access Past event
Brown Bag Seminar with Jonathan Swarbrick, University of St Andrews Bank liquidity and monetary policy
Abstract: I study monetary policies in a New Keynesian economy with frictional bank lending and bank liquidity risk, rationalising evidence that lending conditions can remain tight despite liquidity expansions. Using this model, I identify a policy trade-off whereby increasing the interest paid on reserves by narrowing the corridor can incentivize less lending by increasing credit rationing, but can incentivize more lending by inducing a more liquid interbank market, lowering the overnight rate towards the floor, and thus reducing the marginal cost of lending.
I also find that quantitative easing (QE) can exert a contractionary effect by incentivizing credit rationing when the economy is away from the effective lower bound. The overall impact of QE on the model economy depends on both the degree of firm risk and the size of the programme. However, by increasing inflation expectations, QE is always expansionary at the lower bound.
Finally, negative interest rate policy is found to be especially effective during crisis episodes when the main bank rate is constrained by the effective lower bound.