Optimal monetary policy and financial stability in a non-Ricardian economy

Salvatore Nisticò

No 6/14, Working Papers from Sapienza University of Rome, DISS

Abstract: This paper develops a model with discontinuous asset market participation, in which all agents are infinitely-lived and non-Ricardian, and where heterogeneity among market participants implies financial-wealth effects on aggregate consumption. Derivation of a welfare-based loss function shows that financial stability arises as an additional and independent target, besides infl ation and output stability. Evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal, even absent inefficient supply shocks: some fluctuations in output and infl ation are optimal as long as they reduce financial instability. Ignoring the heterogeneity among market participants in this economy may lead monetary policy to induce substantially higher welfare losses.

Keywords: DAMP; Optimal Monetary Policy; Perpetual Youth; Financial Stability; DSGE Model; Asset Prices; LAMP. (search for similar items in EconPapers)
JEL-codes: E12 E44 E52 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: OPTIMAL MONETARY POLICY AND FINANCIAL STABILITY IN A NON-RICARDIAN ECONOMY (2016)
Journal Article: Optimal Monetary Policy and Financial Stability in a Non-Ricardian Economy (2016)
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