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Effectiveness of monetary policy and limited asset market participation: Neoclassical versus Keynesian effects

Giovanni Di Bartolomeo () and Lorenza Rossi ()

International Journal of Economic Theory, 2007, vol. 3, issue 3, 213-218

Abstract: This paper investigates the effects of limited asset market participation on the effectiveness of monetary policy in a New Keynesian Dynamic Stochastic General Equilibrium model. Although an increase in consumers who cannot access financial markets reduces the effects of interest rate policies through consumption inter‐temporal allocation (neoclassical or permanent income effect), we find an opposite result: monetary policy becomes more effective as the degree of financial market participation falls. The reason has a very Keynesian flavor.

Date: 2007
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Handle: RePEc:bla:ijethy:v:3:y:2007:i:3:p:213-218