Optimal Central Bank Balance Sheets with Incomplete Markets - Zach Bethune

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26

Mai

2026

LEMMA

11h - 12h

Séminaire

Lemma - 4 rue Blaise Desgoffe, 75006 Paris. Salle Maurice Desplas

Zach is a professor at Rice University, and works on macroeconomics, financial economics, monetary, labor, search and matching. He is an Associate Editor at the European Economic Review.

Abstract:

I study the optimal size of a central bank’s balance sheet in a continuous-time, incomplete-markets economy where households self-insure against idiosyncratic income and expenditure risk by accumulating two nominal assets: liquid money and illiquid bonds. The central bank conducts open market operations—swapping money for bonds— and policy determines both the inﬂation rate and the relative supply of liquid and illiquid assets available to the public. As a benchmark, I ﬁrst characterize optimal policy when monetary and ﬁscal instruments are jointly controlled, and then study the central bank’s problem when it is separated from ﬁscal policy. When monetary and ﬁscal policy are jointly chosen, money and bonds operate as two separate instruments that target two distinct redistributive motives: the inﬂation tax shifts resources from wealth-rich to wealth-poor households, while the liquidity premium shifts resources from bond-rich to money-holding households. Under separation, the central bank has only one tool—the relative size of money and bonds on its balance sheet—and its optimal level reﬂects the relative strength of these two motives, growing larger when the gap between wealthy and liquidity-constrained households widens.

Adresse : LEMMA - 4 rue Blaise Desgoffe - 75006 - PARIS