A model of unconventional monetary policy

This paper develops a quantitative monetary DSGE model that allows for financial intermediaries that face endogenous balance sheet constraints. We use the model to simulate a crisis that has some basic features of the current economic downturn. We then use the model to quantitatively assess the eect of direct central bank intermediation of private lending, which is the essence of the unconventional monetary policy that the Federal Reserve has developed to combat the subprime crisis. We show numerically how central bank credit policy might help moderate the simulated crisis. We then compute the optimal degree of central bank credit intervention in this scenario and also compute the welfare gains. 1