Conventional and unconventional monetary policy with frictions
Susan Schommer (UERJ)

We consider the effects of interest-rate policy in a general equilibrium model of asset pricing and risk sharing with endogenous collateral constraints. In order to analyze “conventional” monetary policy (central-bank control of the riskless nominal interest rate) we consider that there is an arbitrarily given predetermined price level for the non-durable good in the initial period; but it may not be realistic to suppose that we can choose any monetary policy we like without the anticipation of that policy having had an effect on the way that prices were set. Hence we consider a second model, in which the non-durable good price and supply commitments are endogenized (modeled as being chosen before agents learn the period 0 state of the world). Here we consider uncertainty (different possible states of the world) in the first period, but assume that the values of non-durable price and supply commitments are chosen prior to the realization of the state, and so are the same for all states in the first period. We examine through numerical examples how the welfare-maximizing choice of interest-rate policy (in each state in the first period) is different depending on the severity of collateral constraints.