Limited asset markets participation, monetary policy and (inverted) aggregate demand logic

Details

Serval ID
serval:BIB_FFFA3A0A5E34
Type
Article: article from journal or magazin.
Collection
Publications
Title
Limited asset markets participation, monetary policy and (inverted) aggregate demand logic
Journal
Journal of Economic Theory
Author(s)
Bilbiie F.O.
ISSN
0022-0531
Publication state
Published
Issued date
05/2008
Peer-reviewed
Oui
Volume
140
Number
1
Pages
162-196
Language
english
Abstract
This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While 'moderate' participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by conventional wisdom. The slope of the 'IS' curve changes sign, the 'Taylor principle' is inverted, optimal welfare-maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. However, a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation. Our results may justify Fed's behavior during the 'Great Inflation' period.
Keywords
Limited asset markets participation, Dynamic general equilibrium, Aggregate demand, Taylor principle, Optimal monetary policy, Real (in)determinacy
Web of science
Create date
01/11/2018 9:11
Last modification date
20/08/2019 17:30
Usage data