Optimal Monetary Policy and Financial Stability in a Non-Ricardian Economy

Salvatore Nisticò

Journal of the European Economic Association, 2016, vol. 14, issue 5, 1225-1252

Abstract: I present a model with discontinuous asset-market participation (DAMP), where all agents are non-Ricardian, and where heterogeneity among market participants implies financial-wealth effects on aggregate consumption. The implied welfare criterion shows that financial stability arises as an additional and independent target, besides inflation and output stability. Evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal, even absent inefficient supply shocks: some fluctuations in output and inflation may be optimal as long as they reduce financial instability. Ignoring the heterogeneity among market participants may lead monetary policy to induce substantially higher welfare losses.

JEL-codes: E12 E44 E52 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (28)

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Related works:
Journal Article: OPTIMAL MONETARY POLICY AND FINANCIAL STABILITY IN A NON-RICARDIAN ECONOMY (2016)
Working Paper: Optimal monetary policy and financial stability in a non-Ricardian economy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:14:y:2016:i:5:p:1225-1252.

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