Optimal monetary policy when asset markets are incomplete

R. Braun and Tomoyuki Nakajima

No CIRJE-F-679, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper considers the properties of an optimal monetary policy when households are subject to countercyclical uninsured income shocks. We develop a tractable incompletemarkets model with Calvo price setting. Incomplete markets creates a new distortion and that distortion is large in the sense that the welfare cost of business cycles is large in our model. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.

Pages: 28pages
Date: 2009-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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http://www.cirje.e.u-tokyo.ac.jp/research/dp/2009/2009cf679.pdf (application/pdf)

Related works:
Working Paper: Optimal Monetary Policy When Asset Markets are Incomplete (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2009cf679

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