MONEY TARGETING, HETEROGENEOUS AGENTS, AND DYNAMIC INSTABILITY

Giorgio Motta and Patrizio Tirelli

Macroeconomic Dynamics, 2015, vol. 19, issue 2, 288-310

Abstract: The limited asset-market participation hypothesis has triggered a debate on DSGE models' determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate in the market for interest-bearing securities hold money. In this case, endogenous monetary transfers between the two groups make it possible to smooth consumption differences, and the model is determinate, provided that the non-negativity constraint on individual money holdings is satisfied.

Date: 2015
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Related works:
Working Paper: Money Targeting, Heterogeneous Agents and Dynamic Instability (2013)
Working Paper: Money Targeting, Heterogeneous Agents and Dynamic Instability (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:19:y:2015:i:02:p:288-310_00

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