Monetary Policy with Heterogeneous Households and Financial Frictions

Jae Won Lee

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: This paper presents and estimates a sticky-price model with heterogenous households and financial frictions. Frictions in state-contingent asset markets lead to imperfect risk-sharing among households with idiosyncratic labor incomes. I study the impacts of the introduced financial frictions on optimal monetary policy by documenting implications for the central bank's objective function, the equation that characterizes inflation-output gap trade-offs, targeting rules, interest rate rules, and welfare of the economy. Employing the estimated model, the paper argues that the central bank should place a stronger emphasis on stabilizing inflation than it has, and failing to do so can generate nontrivial welfare costs.

Keywords: monetary policy; financial frictions; heterogeneous households; New Keynesian; nominal rigidities (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
Pages: 20 pages
Date: 2010-02-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Monetary Policy with Heterogeneous Households and Financial Frictions (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:201002

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