A model of unconventional monetary policy

We develop a quantitative monetary DSGE model with financial intermediaries that face endogenously determined balance sheet constraints. We then use the model to evaluate the effects of the central bank using unconventional monetary policy to combat a simulated financial crisis. We interpret unconventional monetary policy as expanding central bank credit intermediation to offset a disruption of private financial intermediation. Within our framework the central bank is less efficient than private intermediaries at making loans but it has the advantage of being able to elastically obtain funds by issuing riskless government debt. Unlike private intermediaries, it is not balance sheet constrained. During a crisis, the balance sheet constraints on private intermediaries tighten, raising the net benefits from central bank intermediation. These benefits may be substantial even if the zero lower bound constraint on the nominal interest rate is not binding. In the event this constraint is binding, though, these net benefits may be significantly enhanced.