Journal Article

A Liquidity Theory of Risky Asset Purchases

Chien-Chiang Wang(王建強)

2025

Overview

We study the government's policy of risky asset purchases in a monetary search model with banks and household heterogeneity. In our model, assets may encounter an aggregate shock that prompts them to fail to pay dividends, and households face an idiosyncratic shock on their degree of risk aversion. Banks can issue financial claims to share the risks among households, and the claims must be secured by money or risky assets. However, only a portion of transactions accept bank claims as a medium of exchange, and the remaining transactions accept only money. The government's asset purchases decrease the quantity of risky assets held by banks to back the issuance of financial claims, but the purchased assets enter the government's balance sheet and raise the risk of holding money. Thus, this policy can improve social welfare through redistributing risks between households that use only currency and those that use bank claims in transactions. The optimal policy is to purchase only a part of the risky assets, rather than the risky assets as a whole, and for the government to purchase fewer risky assets when banks' financial claims are accepted in more transactions.

• Publisher: 國立臺灣大學經濟學系,Taiwan Economic Review
• Subject: Balance sheets / EconLit / financial crisis / Households / Liquidity / Monetary policy / search model / TSSCI / 搜尋模型 / 貨幣政策 / 金融危機