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

Florin O. Bilbiie

Journal of Economic Theory, 2008, vol. 140, issue 1, pages 162-196

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.

Date: 2008
View citations in EconPapers

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6WJ3 ... 13383df3056a6fda2cc4
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:jetheo:v:140:y:2008:i:1:p:162-196

Access Statistics for this article

Journal of Economic Theory is edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Series data maintained by Heidi Boesdal ().