Article

The safe asset, banking equilibrium, and optimal central bank monetary, prudential and balance-sheet policies

Michael Magill, Jean-Charles Rochet, and Martine Quinzii

Abstract

A simple equilibrium model is presented which permits the joint study of optimal Central Bank prudential, monetary and balance sheet policies in the pre and post 2008 Crisis periods. It explains the new policies—the purchase of risky securities (QE), payment of interest on reserves (IR) and use of reverse repo (RRP)—as the response to the lack of safe assets in the economy, and shows why these policies were not needed to achieve optimality before 2008, but were needed for the 2008 Crisis and thereafter.

Keywords

Banking equilibrium; Capital requirements; Prudential policy; Monetary policy; Balance sheet policy; Quantitative easing; Interest on reserves;

JEL codes

  • D50: General
  • D61: Allocative Efficiency • Cost–Benefit Analysis
  • E58: Central Banks and Their Policies
  • G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
  • G28: Government Policy and Regulation

Reference

Michael Magill, Jean-Charles Rochet, and Martine Quinzii, The safe asset, banking equilibrium, and optimal central bank monetary, prudential and balance-sheet policies, Journal of Monetary Economics, 2020, forthcoming.

Published in

Journal of Monetary Economics, 2020, forthcoming