Monetary policy, interest rates, and liquidity premia

We augment a standard macroeconomic model by accounting for the fact that central banks supply money only in exchange for eligible assets. Monetary policy implementation then matters for the pass-through of policy rate changes and rationalizes liquidity premia on treasuries. The model explains the observed negative relation between corporate bond yield spreads and the amount of available treasuries. Liquidity premia on eligible assets further provide a structural explanation for the systematic wedge between the policy rate and the consumption Euler rate that standard models equate. Nonetheless, monetary policy effects on real activity and inflation are consistent with broad empirical evidence.