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.
• Purchases of long-maturity government debt by the central bank are always a good idea, but for unconventional reasons.
• A floor system is preferred to a channel system, as a floor system permits welfare-improving asset purchases by the central bank.

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 preferred to a channel system, as a floor system permits welfare-improving asset purchases by the central bank.