Schüder, Stefan (2011): Monetary policy trade-offs in a portfolio model with endogenous asset supply. Published in: International Network for Economic Research Working Papers No. 2011.3 (11. November 2011): pp. 1-56.
This is the latest version of this item.
Download (639kB) | Preview
This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers choose an optimal capital structure and finance capital goods through credit, bonds and equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the law of one price.
Within this general equilibrium model, it will be shown that central bank interventions may promote an inefficient international allocation of real capital. The application of expansive monetary interventions throughout the course of economic crises maintains the domestic stock of real capital at the cost of inflation, currency devaluation, distortions of interest rates and asset prices, and risk clusters on the central bank’s balance sheet. Exchange rate stabilising interventions have the result that the central bank can also stabilise the domestic stock of real capital. However, such interventions produce either risk clusters on the central bank's balance sheet or changes in the domestic price level.
|Item Type:||MPRA Paper|
|Original Title:||Monetary policy trade-offs in a portfolio model with endogenous asset supply|
|Keywords:||portfolio balance; monetary policy; real capital; macroeconomic risk; exchange rate|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General
|Depositing User:||Stefan Schüder|
|Date Deposited:||11. Nov 2011 17:11|
|Last Modified:||16. Feb 2013 05:23|
Akerlof, George A. and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton University Press, 2009.
Allen, Polly R. and Peter B. Kenen, Asset Markets and Exchange Rates, Cambridge University Press, 1983.
Angeletos, George-Marios and Ivan Werning, Crises and Prices: Information Aggregation, Multiplicity, and Volatility, American Economic Review, 2006, 96 (5), 1720-1736.
Backus, David, William C. Brainard, Gary Smith, and James Tobin, A Model of U.S. Financial and Nonfinancial Economic Behavior, Journal of Money, Credit and Banking, 1980, 12 (2), 259–293.
Bernanke, Ben S. and Alan S. Blinder, Credit, Money, and Aggregate Demand, American Economic Review, 1988, 78 (2), 435-439.
Bernanke, Ben S. and Alan S. Blinder, The Federal Funds Rate and the Channels of Monetary Transmission, American Economic Review, 1992, 82 (4), 901-921.
Bernanke, Ben S. and Kenneth N. Kuttner, What Explains the Stock Market's Reaction to Federal Reserve Policy?, Journal of Finance, 2005, 60 (3), 1221-1257.
Bernanke, Ben S. and Vincent R. Reinhart, Conducting Monetary Policy at Very Low Short-Term Interest Rates, American Economic Review, 2004, 94 (2), 85-90.
Bernanke, Ben S., Vincent R. Reinhart, and Brian Sack, Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment, Brookings Papers on Economic Activity, 2004, (2), 1-100.
Bolton, Patrick and Xavier Freixas, Corporate Finance and the Monetary Transmission Mechanism, The Review of Financial Studies, 2006, 19 (3), 829-870.
Borio, Claudio E. V. and Haibin Zhu, Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?, BIS Working Paper, 2008, (268).
Brainard, William C. and James Tobin, Pitfalls in Financial Model Building, American Economic Review, 1968, 58 (2), 99-122.
Branson, William H., Asset Markets and Relative Price in Exchange Rate Determination, Sozialwissenschaftliche Annalen, 1977, 1, 69-89.
Branson, William H. and Dale W. Henderson, The Specification and Influence of Assets Markets, in Ronald W. Jones and Peter B. Kenen, eds., Handbook of International Economics, Vol. 2, North-Holland, 1985, pp. 749-805.
Bullard, James, Testing Long-Run Monetary Neutrality Propositions: Lessons from the Recent Research, Review, Federal Reserve Bank of St. Louis, 1999, (Nov), 57-77.
Burstein, Ariel and Christian Hellwig, Welfare Costs of Inflation in a Menu Cost Model, American Economic Review, 2008, 98 (2), 438-443.
Christiano, Lawrence J., Martin Eichenbaum, and Charles Evans, The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds, Review of Economics and Statistics, 1996, 78 (1), 16-34.
Devereux, Michael B. and Alan Sutherland, Monetary Policy and Portfolio Choice in an Open Economy Macro Model, Journal of the European Economic Association, 2007, 5 (2-3), 491-499.
Devereux, Michael B. and Makoto Saito, A Portfolio Theory of International Capital Flows, COE/RES Discussion Paper, 2006, (173).
Dominguez, Kathryn M. E., When do central bank interventions influence intra-daily and longer-term exchange rate movements?, Journal of International Money and Finance, 2006, 25 (7), 1051-1071.
Dornbusch, Rudiger, A Portfolio Balance Model of the Open Economy, Journal of Monetary Economics, 1975, 1 (1), 3-20.
Eichengreen, Barry, Andrew K. Rose, Charles Wyplosz, Bernard Dumas, and Axel Weber, Exchange Market Mayhem: The Antecedents and Aftermath of Speculative Attacks, Economic Policy, 1995, 10 (21), 249–312.
Frankel, Jeffrey A. and Kenneth A. Froot, Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations, American Economic Review, 1987, 77 (1), 133-153.
Frankel, Jeffrey, Sergio L. Schmukler, and Luis Servn, Global transmission of interest rates: monetary independence and currency regime, Journal of International Money and Finance, 2004, 23 (5), 701-733.
Friedman, Benjamin M., Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits, Brookings Papers on Economic Activity, 1978, 1978 (3), 593–641.
Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack, The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases, International Journal of Central Banking, 2011, 7 (1), 3–43.
Girton, Lance and Dale W. Henderson, Financial capital movements and central bank behavior in a two-country, short-run portfolio balance model, Journal of Monetary Economics, 1976, 2 (1), 33-61.
Gourinchas, Pierre-Olivier and Helene Rey, International Financial Adjustment, Journal of Political Economy, 2007, 115 (4), 665-703.
Grubel, Herbert G., Internationally Diversified Portfolios: Welfare Gains and Capital Flows, American Economic Review, 1968, 58 (5), 1299-1314.
Hands, D. Wade, Stabilizing Consumer Choice: The Role of `True Dynamic Stability' and Related Concepts in the History of Consumer Choice Theory, European Journal of the History of Economic Thought, 2010, 17 (2), 313-343.
Hau, Harald and Helene Rey, Exchange rates, equity prices, and capital flows, Review of Financial Studies, 2006, 19 (1), 274-317.
Heathcote, Jonathan and Fabrizio Perri, The International Diversification Puzzle Is Not As Bad As You Think, 2009. Recent version of NBER Working Paper 13483, 2007.
Helg, Rodolfo, Paolo Manasse, Tommaso Monacelli, and Riccardo Rovelli, How much (a)symmetry in Europe? Evidence from industrial sectors, European Economic Review, 1995, 39 (5), 1017-1041.
Jensen, Michael C., Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review, 1986, 76 (2), 323-329.
Jensen, Michael C. and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, 1976, 3 (4), 305-360.
Joyce, Michael, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong, The Financial Market Impact of Quantitative Easing in the United Kingdom, International Journal of Central Banking, 2011, 7 (3), 113–161.
Kashyap, Anil K., Jeremy C. Stein, and David W. Wilcox, Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance, American Economic Review, 1993, 83 (1), 78-98.
Klyuev, Vladimir, Phil de Imus, and Krishna Srinivasan, Unconventional Choices for Unconventional Times: Credit and Quantitative Easing in Advanced Economies, IMF Staff Position Note, 2009, 27.
Lagos, Ricardo and Guillaume Rocheteau, Inflation, Output, and Welfare, International Economic Review, 2005, 46 (2), 495-522.
Levy-Yeyati, Eduardo and Federico Sturzenegger, Classifying exchange rate regimes: Deeds vs. words, European Economic Review, 2005, 49 (6), 1603-1635.
Levy Yeyati, Eduardo, Federico Sturzenegger, and Iliana Reggio, On the endogeneity of exchange rate regimes, European Economic Review, 2010, 54 (5), 659–677.
Lucas, Robert E., Interest rates and currency prices in a two-country world, Journal of Monetary Economics, 1982, 10 (3), 335-359.
Lucas, Robert E. Jr., Inflation and Welfare, Econometrica, 2000, 68 (2), 247-274.
Magni, Carlo A., Splitting up value: A critical review of residual income theories, European Journal of Operational Research, 2009, 198 (1), 1–22.
Markowitz, Harry, Portfolio Selection, Journal of Finance, 1952, 7 (1), 77-91.
Meade, James E., The balance of payments, Oxford: Oxford University Press, 1951.
Merton, Robert C., On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, Journal of Finance, 1974, 29 (2), 449-470.
Metzler, Lloyd A., Stability of Multiple Markets: The Hicks Conditions, Econometrica, 1945, 13 (4), 277-292.
Minsky, Hyman P., Stabilizing an Unstable Economy, Yale University Press, 1986.
Mishkin, Frederic S., Financial Policies and the Prevention of Financial Crises in Emerging Market Countries, NBER Working Paper, 2001, (8087).
Modigliani, Franco and Merton H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, 1958, 48 (3).
Modigliani, Franco and Merton H. Miller, Corporate Income Taxes and the Cost of Capital: A Correction, American Economic Review, 1963, 53 (3).
Myers, Stewart C., Determinants of Corporate Borrowing, Journal of Financial Economics, 1977, 5 (2), 147-175.
Neely, Christopher J., The Federal Reserve Responds to Crises: September 11th Was Not the First, Federal Reserve Bank of St. Louis Working Paper, 2003, (2003-034A).
Obstfeld, Maurice, External Adjustment, Review of World Economics, 2004, 140 (4), 541-568.
Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor, The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility, Review of Economics and Statistics, 2005, 87 (3), 423-438.
Ozturk, Ilhan, Exchange Rate Volatility and Trade: A Literature Survey, International Journal of Applied Econometrics and Quantitative Studies, 2006, 3 (1), 85-102.
Patinkin, Don, Money, Interest, and Prices: An Integration of Monetary and Value Theory, New York: Harper & Row, 1966.
Pavlova, Anna and Roberto Rigobon, Asset Prices and Exchange Rates, Review of Financial Studies, 2007, 20 (4), 1139-1180.
Reinhart, Carmen M. and Kenneth S. Rogoff, The Modern History of Exchange Rate Arrangements: A Reinterpretation, Quarterly Journal of Economics, 2004, 119 (1), 1.
Rodrik, Dani, The Real Exchange Rate and Economic Growth, Brookings Papers on Economic Activity, 2008, 39 (2), 365–439.
Sarno, Lucio and Mark P. Taylor, Official Intervention in the Foreign Exchange Market: Is It Effective and, If so, How Does It Work?, Journal of Economic Literature, 2001, 39 (3), 839-868.
Schwert, G. William, Why Does Stock Market Volatility Change over Time?, Journal of Finance, 1989, 44 (5), 1115-53.
Serletis, Apostolos and Zisimos Koustas, International Evidence on the Neutrality of Money, Journal of Money, Credit and Banking, 1998, 30 (1), 1-25.
Shambaugh, Jay C., The Effect of Fixed Exchange Rates on Monetary Policy, Quarterly Journal of Economics, 2004, 119 (1), 301-352.
Sims, Christopher A., Macroeconomics and Reality, Econometrica, 1980, 48 (1), 1-48.
Swiss National Bank, Monetary policy report, Swiss National Bank Quarterly Bulletin, 2011, 29 (3), 4–31.
Tille, Cedric, Financial integration and the wealth effect of exchange rate fluctuations, Journal of International Economics, 2008, 75 (2), 283-294.
Tille, Cedric and Eric van Wincoop, International Capital Flows, Journal of International Economics, 2010, 80 (2), 157-175.
Tobin, James, A General Equilibrium Approach To Monetary Theory, Journal of Money, Credit and Banking, 1969, 1 (1), 15–29.
Tobin, James, Money and Finance in the Macroeconomic Process, Journal of Money, Credit and Banking, 1983, 14 (2), 171–204.
Available Versions of this Item
Monetary policy trade-offs in a portfolio model with endogenous asset supply. (deposited 05. Jul 2011 14:03)
- Monetary policy trade-offs in a portfolio model with endogenous asset supply. (deposited 11. Nov 2011 17:11) [Currently Displayed]