Optimal Monetary Policy When Asset Markets are Incomplete

R. Anton BRAUN and Tomoyuki Nakajima

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: his paper considers the properties of an optimal monetary policy when households are subject to counter-cyclical uninsured income shocks. We develop a tractable incomplete-markets model with Calvo price setting. In our model the welfare cost of business cycles is large when the variance of income shocks is counter-cyclical. 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.

New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mic and nep-mon
Date: 2009-10
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Persistent link: http://EconPapers.repec.org/RePEc:eti:dpaper:09050

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