Scarce collateral, the term premium, and quantitative easing

A model of money, credit, and banking is constructed in which the differential pledgeability of collateral and the scarcity of collateralizable wealth lead to a term premium —an upward-sloping nominal yield curve. Purchases of long-maturity government debt by the central bank are always a good idea, but for unconventional reasons. A floor system is always welfare improving, as it gives the central bank an extra degree of freedom. ∗The views expressed are those of the author and do not necessarily reflect offi cial positions of the Federal Reserve Banks of Richmond and St. Louis, the Federal Reserve System, or the Board of Governors of the Federal Reserve System. The author thanks conference participants at Tsinghua University and the Bank of Italy, and Neil Wallace, for helpful comments and suggestions.