Optimal monetary policy under incomplete markets and aggregate uncertainty: A long-run perspective

Oleksiy Kryvtsov, Malik Shukayev () and Alexander Ueberfeldt

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 7, 1045-1060

Abstract: This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy by changing real returns of nominal bonds via variation in expected inflation. Optimal expected inflation is procylical and on average higher than without uncertainty. Simple inflation targeting rules closely approximate the optimal monetary policy.

Keywords: Optimal; monetary; policy; Inflation; targeting (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:7:p:1045-1060

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