 Limited asset market participation and monetary policy in a small open economyPaul Levine (), Stephen McKnight, Alexander Mihailov () and Jonathan Swarbrick Journal of Economic Dynamics and Control, 2025, vol. 173, issue C Abstract: Limited asset market participation (LAMP) and trade openness are crucial features that characterize all real-world economies. We study equilibrium determinacy and optimal monetary policy in a model of a small open economy with LAMP. With low enough participation in asset markets, conventional wisdom concerning the stabilizing benefits of policy inertia can be overturned, irrespective of the constraint of a zero lower bound on the nominal interest rate. In contrast to recent studies, trade openness can play an important stabilizing role in LAMP economies. Optimal monetary policy is derived as a robust timeless rule, where the optimal level of interest-rate inertia depends on the degree of trade openness. The optimal rule is shown to be super-inertial for standard economies, whereas the degree of inertia is significantly lower and not super-inertial for LAMP economies. Keywords: Limited asset market participation; Small open economy; Inverted aggregate demand logic; Equilibrium determinacy; Interest-rate inertia; Optimal monetary policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:173:y:2025:i:c:s0165188925000132 DOI: 10.1016/j.jedc.2025.105047 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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