Seminar on "Real Consequences of Open Market Operations: the role of Limited Commitment", Francesco Carli, Deakin University - September 9th
On September 9th from 12:00 to 13.00 Francesco Carli, Deakin University, will give a seminar on "Real Consequences of Open Market Operations: the role of Limited Commitment".
We study how limited commitment in credit markets affects the implementation of open market operations and characterize when they result in real indeterminacies and when they have real effects. To do so, we consider a frictional and incomplete market framework where agents face stochastic trading opportunities and limited commitment. We find necessary and sufficient conditions for the existence of a unique monetary equilibrium when limited commitment does not restrict agent’s choices. However, real indeterminacies are possible when buyers face a binding no-default constraint. We also show that when the endogenous borrowing limit binds and bonds are not priced fundamentally, open market operations generically have real effects. A sale of government bonds can increase or decrease interest rates, depending on the nature of the equilibria. These interest rate effects critically depend on the size of the bond’s premium. Finally, government bond purchases can be used to rule out real indeterminacies, thus finding another rationale for such policy.
The event will take place in room B, first floor, building B.