THE EFFECTS OF OPEN MARKET OPERATIONS IN A MODEL OF INTERMEDIATION AND GROWTH

This article presents a monetary growth model where spatial separation and limited communication create a role for banks. Monetary policy in teracts with the financial system's liquidity provision to affect the existence, multiplicity, and dynamical properties of equilibria. Moder ate levels of risk aversion and tight monetary policy can lead to mult iple steady states. Dynamical equilibria can be indeterminate, with os cillatory paths. Thus financial market frictions are a source of indet erminacies and endogenous volatility. Under plausible conditions, tigh t monetary policy raises the nominal interest rate and inflation rate and reduces long run output. Thus, a central bank's liquidity provisio n can promote growth.