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Title: Safe Assets, Liquidity and Monetary Policy

Author(s): Pierpaolo Benigno and Salvatore Nisticò

Publication Date: December 2013

Keyword(s): liquidity crisis, unconventional policies and zero lower bound

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest-rate spreads and can cause a deep recession cum deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.

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Bibliographic Reference

Benigno, P and Nisticò, S. 2013. 'Safe Assets, Liquidity and Monetary Policy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9767