Asset Market Participation, Monetary Policy Rules and the Great Inflation

Florin Bilbiie and Roland Straub

No 8555, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price DSGE model, whereby at low enough asset market participation, standard aggregate demand logic is inverted: interest rate increases become expansionary. Thereby, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare, suggesting that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom suggests. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation.

Keywords: Great inflation; Great moderation; Limited asset markets participation; Passive monetary policy rules; Aggregate demand; Real (in)determinacy; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E52 E58 E65 N12 N22 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2013)
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2013)
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2013)
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2013)
Working Paper: Asset market participation, monetary policy rules and the great inflation (2012)
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2006)
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