Working Paper Revision

Optimal Asset Market Operations

Abstract: We provide a unifying theory of how governments should trade assets in response to economic disturbances. Across a broad class of models with financial frictions, the first-order Ramsey plan is characterized by a target relationship among asset returns. The relationship is determined by empirically measurable asset demand and supply elasticities and can be implemented without having to identify the underlying frictions or disturbances. Due to financial frictions, optimal policy may preserve or widen spreads between returns to steer intermediation; absent this concern, the target stabilizes spreads across assets. Applied to the U.S. economy, the target calls for supplying liquid assets and absorbing illiquid assets during the 2008–09 financial crisis while maintaining a sizable spread.

JEL Classification: E2; E6; H3; H6;

https://doi.org/10.20955/wp.2025.014

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2026-09-16

Number: 2025-014

Related Works

• Working Paper Revision (2026-09-16) : You are here.
• Working Paper Original (2025-06-16) : Optimal Asset Market Operations