Limited Asset Market Participation and the Optimal Fiscal and Monetary Policies

Lorenzo Menna and Patrizio Tirelli

No 284, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: In the workhorse DSGE model, the optimal steady state inflation rate is near to zero or slightly negative and inflation is almost completely stabilized along the business cycle (Schmitt-Grohè and Uribe, 2011). We reconsider the issue, allowing for agent heterogeneity in the access to the market for interest bearing assets. We show that inflation reduces inequality and that LAMP can justify relatively high optimal inflation rates. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is well above 2%. The optimal response to shocks is also a¤ected. Rather than using public debt to smooth tax distortions, the Ramsey planner front loads tax rates and reduces public debt variations in order to limit the redistributive e¤ects of debt service payments.

Keywords: trend ination; monetary and scal policy; Ramsey plan; Limited Asset Market Participation. (search for similar items in EconPapers)
JEL-codes: E24 E52 E58 J51 (search for similar items in EconPapers)
Pages: 29
Date: 2014-10, Revised 2014-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:284

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