Quantitative Easing and the IS/LM Framework

Manmohan Singh

This chapter deals with the relative prices of money and collateral as both contribute towards financial lubrication in the markets. With some central banks now a major player in the collateral markets, the larger the quantitative easing (QE) efforts, the longer these central banks will impact the collateral market and associated collateral rates (ie, prime brokerage, repo, sec-lending and derivative margins). This may have monetary- policy and financial-stability implications, since some rates (eg, repo) are dependent on the large bank’s balance sheets that intermediate collateral to money, and money to collateral transactions.

INTRODUCTION

Collateral is not integrated within the money or monetary policy textbooks. Undergraduate macroeconomic textbooks still use the IS/LM (standing for investment, saving; and liquidity preference and money supply) model as a construct to demonstrate the relationship between interest rates and real output in the goods and services market and the money market. In this model (see Figure 4.1), the intersection of the IS and LM curves is where there is simultaneous equilibrium in both markets. In the figure, the horizontal axis represents output