We consider the effects of central bank purchases of a risky asset as an additional dimension of policy alongside "conventional" interest rate policy in a general-equilibrium model of asset pricing with endogenous collateral constraints. The effects of asset purchases depend on the way that they affect collateral constraints. 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 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. (JEL D51, E43, E44, E52, E58)
Araújo, Aloísio, Susan Schommer, and Michael Woodford.
"Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints."
American Economic Journal: Macroeconomics,
Exchange and Production Economies
Interest Rates: Determination, Term Structure, and Effects
Financial Markets and the Macroeconomy
Central Banks and Their Policies