Presenter: Piotr Zoch (University of Warsaw)
Co-authors: Yu-Ting Chiang (St. Louis Fed)
Title: Optimal Asset Market Operations
Abstract: We use a sufficient statistics approach to study the government's optimal asset market operations in an economy with financial frictions. The financial sector intermediates productive assets and supplies various financial assets to meet household demand, while the government can trade financial assets in response to shocks to productive assets. We characterize the government's optimal response in terms of expected returns and asset supply and demand elasticities. For a large class of financial frictions, microfoundations are irrelevant for optimal asset market operations as the financial sector's asset supply and demand elasticities provide sufficient information and can be measured directly in the data. Optimal targets for financial returns feature larger movements if the financial sector's elasticities are high and the household's are low. We estimate these elasticities for the U.S. economy.